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Capital To-Day 

A Study of Recent 
Economic Development 



By 
Herman Gahn 



r 



G. P. Putnam's Sons 

New York and London 
Cbe 1f:nicfterbocftet ipress 

1915 

/ 



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iSfil^ 



Copyright, 1915 

BY 

HERMAN CAHN 



Ube IknfcIierbocKtcr press, 'Mew HJorlt 

QEC -7 !9I5 



^0 

MY DAUGHTER 

ANITA C. BLOCK 



PREFACE 

The following study has been written with special 
reference to the present economic situation in the 
United States, the essential features of which have 
been developed since the Civil War. But as the 
laws underlying the capitalist mode of production 
and its tendencies are the same everywhere, such 
special reference to one country partakes of the char- 
acter of an illustration of conditions obtaining or 
shaping themselves to-day in all advanced industrial 
countries. 

The most momentous developments during this 
period are the centralization of control of capital 
and the modification of the money system. The 
latter is by far the more portentous. Yet it is the 
former which occupies public attention, while silence 
reigns concerning the menacing money question. 
True, when things financial are at sixes and sevens 
the facts are published and the means for overcoming 
the emergency discussed ; but the theoretic treatment 
of this important subject is neglected or avoided by 
those whose particular function it is to study such 
subjects theoretically, namely, the paid specialists 
in political economy at the universities. 

The seemingly mystic nature of money cannot 
be cleared up alone, that is, disconnected from the 



VI 



Preface 



general economics of the commodity -producing soci- 
ety, especially of its capitalist form. Such a society 
exists only by the exchange of the products of indi- 
viduals; therefore value is the foundation of its eco- 
nomics. The theoretic analysis of value has been 
the work of the great economist Karl Marx. But, 
some readers may say, almost every economist has 
his own theory of value. Such a bewilderment of 
mind in our own time is tolerated only in that 
discipline which treats of the material interests of 
different classes. The investigators in the natural 
sciences can afford to employ methods and proofs 
which, consciously or unconsciously, are dictated 
by a theory of knowledge or human understanding. 
Are human affairs then the only thing closed to sci- 
entific understanding, the only thing in which truth 
cannot be positively distinguished from untruth, 
and regarding which there may therefore exist differ- 
ent theories? If the Marxian theory of value can 
be tested by the rules of science, based on the theory 
of understanding, then all deviating theories of value 
are unscientific and false. As a matter of fact the 
latter have merely the "marginal utility " of a barrier 
against the spread of scientific economics. 

The foregoing considerations are responsible for 
the form of this book. Obviously it was necessary 
to start with an exposition of the foundation of all 
knowledge. Armed with this understanding the 
reader himself will be able to judge whether Marx's 
method was scientific, and whether or not in the 
further sequence of facts submitted by me I have 
been successful in following his method. 



Preface vii 

Shortly after the completion of my manuscript 
occurred the outbreak of the great war. It brought 
with it economic perturbations which, in spite of the 
fact that they have been partly overcome at this 
writing, have left behind them their portentous 
symptomatic significance. Such were the precipi- 
tous fall of stock exchange securities and the closing 
of the world's stock exchanges to prevent further 
official depreciation ; the dropping of the gold reserve 
of the Bank of England in the course of a few days 
from about 52% to 14%; the decrees of moratoria 
or suspension of the laws for the collection of debts, 
including bank deposits, almost all over the world, 
except the United States; the practical cessation of 
foreign exchange as a medium for settling obliga- 
tions, the rates for sterling having risen in New York 
at one time to $6 @ $7 ; the suspension of discounting 
by the English banks and its resum.ption by them 
under guaranty of payment of the private bills by 
the government, which also assumed the shipping 
risk on English commerce; the large issues of circu- 
lating notes in various countries, those of the Reichs- 
bank increasing between July 23d and August 31st 
from $472,500,000 to $1,058,500,000 while its metallic 
stock fell off slightly, those of the Bank of France 
increasing from 6683 million francs on July 30th to 
9299 millions on October ist; the subsequent move- 
ment of exchange against neutral as well as belligerent 
European countries, so that for instance Germany 
and Italy could for some time past have saved one 
million dollars out of every eight of the cost of their 
purchases in the United States, had they been willing 



viii Preface 

to come forward with their gold; the universal in- 
dustrial depression which in important industries in 
the United States reached the low point of 25% of 
capacity. 

Some of these happenings have been referred to 
in this book as contingencies. But I flatter myself 
with the hope that the thoughtful reader will be 
assisted by its perusal in understanding the signifi- 
cance of all these past events, as well as of others 
that may follow in the future. In a few instances 
new statistics were published between the completion 
of my manuscript and the printing of this book. Of 
these I have not hesitated to avail myself. 

I realize that the dialectics of the first few chapters 
make somewhat difficult reading, but this was hardly 
avoidable. 

Herman Cahn. 

New York, May, 1915. 



CONTENTS 



PAGE 

Introduction ...... i 

CHAPIER 

I. — Economics a Science .... 14 

II. — Marxian Theory of Value Briefly 

Stated ...... 28 

III. — The Contradictory Functions of 

Money ...... 43 

(a) Circulating Medium . . 43 

(b) Measure of Value . . 49 

(c) Means of Deferred Pay- 

ment 53 

IV. — The Handicaps of the Money System . 65 

(a) Wastefulness of the Gold- 

Basis ..... 65 

(b) Inadequacy of Gold Basis . 67 

V. — Money Tokens ..... 84 

(a) General Theory ... 84 

(b) Proof of General Theory by 

Deviating Hypotheses . 95 

(c) Silver Tokens . . .107 
VI. — Money of Account . . . .114 

ix 



^ 



X Contents 

CHAPTER PAGE 

VII. — Totality of the Money System in the 
United States 



(a) Conditions Prior to Federal 
\ Reserve Act . 

(b) Federal Reserve Act . 
VIII . — The Cycle of Industrial Capital . 

IX. — The Mystery of Capitalism 



149 

149 
155 
167 
186 
209 



X. — Fictitious Capital 

(a) Transformation of Profit- 
Bearing TO Interest-Bearing 
Capital ..... 209 

(b) Capitalization Applied at 

THE Source .... 234 

XI. — The Concentration of Industrial 

Capital . . . . . . 251 

XII. — The Concentration of Money Capi- 
tal ...... 284 

XIII. — The Unified Capital and Conclusion. 307 



Capital To-Day 



Capital To-Day 



INTRODUCTION 

The economic developments of overshadowing 
importance produced by the last fifty years are 
the high degree of concentration of capital at- 
tained in the leading industrial countries of the world, 
the United States and Germany, and the creation of 
a vast amount of nominal money consisting of tokens 
and bank deposits, all of which represent gold, not- 
withstanding the non-existence of the latter as their 
counterpart. 

It is to-day plainly observable that concentration 
of capital tends to increase the control of the social 
forces of production by the capitalist class. The 
question is whether this tendency can continue to 
operate also in the future as a result of continued 
concentration, or whether there exist factors which 
will at a certain stage of development of the industrial 
countries halt the further progress of capitalist con- 
trol of the productive forces. 

The increase of control so far gained by the capi- 
talists appears, for the time being, as a refutation of 
Marx's prediction that they would ultimately reach 



2 Capital To-Day 

a state of inability to cope with the social forces of 
production growing irresistibly under the compul- 
sion of competition. What he apprehended was that 
this inability would lead to unbearable conditions 
before a high degree of concentration of capital could 
be accomplished by the competitive method, then 
the main operating force. The industries of Eng- 
land, in his time the only industrial country in the 
world, had grown up spontaneously from small be- 
ginnings and were then owned, as were also the banks, 
by individuals and partnerships, many of which, 
to be sure, had grown very rich. The competitive 
struggle, resulting in the survival of a few giants, 
was evidently to be long and painful, unless ter- 
minated by the intelligent action of the proletariat. 
We shall, however, find that among the advanced 
industrial countries of the present day it is only the 
United States in which economic conditions have 
developed that may present the possibility of an 
exception to the fulfillment of that prediction. 
Fifty years ago this country had only just emerged 
from colonial conditions, taken the reins of govern- 
ment out of the hands of the free-trade agrarians, 
and placing them into those of the protectionist 
industrial capitalists, begun its wonderful industrial 
career. 

Since that time, under customs tariffs designed 
originally as a protection against England's well- 
established industries, we have seen the rise of the 
United States and Germany to leadership in the 
organization of industrial and banking capital, 
although England still remains the international 



Introduction 3 

financial center and clearing house. The new in- 
dustrial countries were spared the early stages of 
industrial evolution in England and could start their 
plants at once on a scale called for by modem tech- 
nique. When success was assured, the tariffs, which 
had been instituted for the protection of "infant 
industries," furnished the condition for something 
entirely different — the combining of industries into 
trusts or kartells. The present purpose of protective 
tariffs is to secure for the combinations monopolistic 
extra profits in the home markets, thereby enabling 
them to export the surplus of a production, conducted 
without limits as to the scale necessary to attain the 
minimum cost of their products, at whatever might 
be the world market price, even if it entailed a loss. 
Both the United States and Germany have evolved 
a high degree of identity of banking and industrial 
capital and both countries are still on the ascending 
curve of capitalist development. Nothing proves 
the latter statement better than the fact that Ger- 
many has ceased to be a country of emigration and 
has instead become one rather of immigration, as 
also the United States continues to be. 

So far the economic development of both countries 
has been parallel. Is it possible for this parallelism 
to continue? 

Large-scale production by any nation is dependent 
on two conditions: first, the assurance of the supply 
of its raw and accessory materials; second, a sufficient 
market for its products. 

Only territorially very extensive economic units 
may possibly be so situated as to approximate these 



4 Capital To-Day 

conditions. In this most important respect the 
contrast between this country and Germany could 
scarcely be much greater. And this remark holds 
good also in comparing this country with the other 
new industrial countries, all of whom are under the 
necessity of maintaining protective tariffs at least 
as high as the leading nations. 

The United States is a country of continental 
dimensions producing, or able to produce, all impor- 
tant raw and accessory materials with few exceptions 
(such as silk, tin, and rubber). It has a large and 
growing population accustomed to a high standard 
of comfort. On such a basis an orderly continu- 
ance of the process of concentration and increasing 
control of the forces of production by the capitalist 
class must be admitted, so far as the merely tech- 
nical conditions of industry are concerned. 

Germany, on the other hand, is a country so small 
in area that it would only equal Texas after a slice 
as large as New England had been cut off that State, 
Aside from coal and iron it is deficient in all important 
raw and accessory materials. Its home market has 
been growing, but has narrow limitations. 

How to overcome the precariousness of the supply 
of materials and to secure a reliable market, commen- 
surate with production on the largest scale, is there- 
fore Germany's problem. But a market, in the mind 
of the German trust magnates, is no longer identical 
with the old-fashioned conception of a place where 
you try to sell a little cheaper than your competitor. 
They have outgrown the idea of competition and 
become accustomed to monopolistic extra profits. 



Introduction 5 

Also these extra profits seek investment, not to be 
lent out to foreigners at simple interest in the manner 
of the French and the Dutch, and to a certain extent 
by the English, but as industrial capital operating 
in more backward countries to the exclusion of com- 
petition. A leading role is played in this movement 
of industrial capital by the metal and other heavy 
industries which export to such countries rails and 
rolling stock for railroads and tramways, machinery 
and chemicals for the mining of metals and other 
minerals, apparatus and wire for electrical plants, 
etc. Thus these industries have become most effi- 
cient agents for the introduction of the capitalist 
mode of production into every part of the world, and 
have gained the most influential position in shaping 
the economic policies of their countries. For the 
part they play in revolutionizing the world the textile 
industry, up to fifty years ago the leader, was not 
adapted, — its products having been adapted only 
for exportation as merchandise, and not for exporta- 
tion as capital. 

But permanent industrial investment requires an 
entirely different degree of security from that of 
commerce in which the relation is ended by the mere 
changing hands of commodities and money. That 
degree of security can be obtained only by the exercise 
of control over the regions to which products or 
money are to be exported as capital investments, 
aside from the exportation to them of products as 
merchandise on a non-competitive price basis. 

This is the modern animus of industrial countries 
for the acquisition of colonies and the annexation of 



6 Capital To-Day 

contiguous territory. To expansion by these means 
have been added protectorates, spheres of influence, 
financial control of dependent countries, and special 
concessions, contracts, and treaties as collateral 
conditions of loans. It needs political power to 
back up a policy by which the former commercial 
competition has been changed into political competi- 
tion in which military power lends support to the 
demand of economic advantages, as well as the pro- 
mise of protection against others. Modern industrial 
states must therefore above all else be ''powers.'* 
At present the "powers" stand at the gates of China, 
their eyes greedily directed at her fabulous resources, 
but each power waiting the favorable moment for 
compassing the undoing of its competitors in order 
to grab as much as possible of this greatest prize in 
the world. 

The customs barriers erected around everv coun- 
try by the flood tide of capitalism in the last half- 
century and the striking success of protectionism, 
especially in Germany, produce a favorable milieu 
for engendering a nationalistic spirit (as evidenced 
by the ever-increasing armaments) which is a stand- 
ing menace to the peace of Europe. The spirit of 
national antagonism has again decidedly gained the 
upper hand over the cosmopolitan tendencies of 
the bourgeoisie of the free-trade era of Cobden and 
Bright. 

It is therefore evident that an orderly development 
of industrial and financial concentration in Germany 
and the other aspiring industrial countries of Europe, 
a development such as is technically possible in the 



Introduction * 7 

United States, meets with insurmountable political 
obstacles. With regard to all European industrial 
countries no factors have developed since Marx to 
modify his prediction of the coming inability of the 
capitalist class to cope with the forces of production. 

But even in the United States the attainment of 
the ultimate goal of the present centralizing tenden- 
cies, namely capitalist oligarchy, though technically 
unimpeded, is likely to be crossed by developments 
which are in store in relation to the financial mechan- 
ism of all capitalist countries, including the United 
States. 

The development of this mechanism has reached 
a pass where it has become the most momentous fact 
in economics. Money has been a fundamental and 
indispensable tool ever since use-values were pro- 
duced to any considerable extent for exchange, 
instead of for consumption by the family or com- 
munity, as theretofore. The commodity -producing 
society effected first the social division of labor (the 
distribution of the products being effected by ex- 
change) and later, during its capitalist period, the 
partial socialization of the means of production. 
This socialization consists : 

First, in the working out of an average profit rate 
for all industrial capital, so that the profit of each 
special capital or sphere is not determined by its 
own rate of surplus value, but by the total surplus 
value produced by the total industrial capital, in 
which each special capital participates pro rata, as 
in a social dividend. The fact that the social divi- 
dend has more recently been apportioned according 



8 Capital To-Day 

to two average rates of profit, one for competitive 
capital and the other for monopoHes, is not to be 
interpreted as reactionary and as nulHfying socializa- 
tion, but on the contrary as the powerful lever, 
employed by evolution, to advance the socialization 
of the means of production to a higher form by con- 
centration. 

Second, in the function of the banks as agents for 
placing the social money capital at the disposal of 
the industrial capitalists, so that the lenders are not 
the owners of the money. It is the depositors' 
money which the banks are lending. On the other 
hand the borrowers of the great bulk of the money 
are not its users. The users, from the president of a 
corporation down to the flagman or floor-sweeper, 
are only employees. 

But social production, without social control, is 
possible in no other way than by the social recognition 
of a single exclusive commodity as the standard of 
value and the universal medium of exchange. This 
recognition has been the only absolutely social act 
of the human race. By this act gold became the 
world's money. 

But the above-mentioned two functions of money 
are contradictory, the first requiring scarcity, the 
second abundance. The contradiction did not mani- 
fest itself with any severity during the long period 
of small production. Nor even when the needs of 
capitalist machine production on a large scale led 
to the invention of paper money and of bookkeeping 
money, called bank deposits, as an addition to the 
required, but delinquent gold, did the purely nominal 



Introduction 9 

money excite any particular suspicion. Marx, of 
course, distinguished between the reality and the 
fiction, and also recognized the latter' s capacity for 
producing crises. Yet it was impossible in his Eng- 
land of the sixties, when bookkeeping money was in 
its infancy, to suspect that this infant would grow 
up into a Frankenstein, threatening to destroy its 
maker, and that it was just the necessity of com- 
modity money which would prove to be the most 
fatal defect of the commodity -producing society. 
The development of the financial mechanism since 
then makes it plain that the phenomenon of money, 
the basis of every form of commodity-producing 
society, is of more fundamental and momentous 
import than that of the mere accumulation and con- 
centration of capital, which latter phenomenon ac- 
companies only the latest development of that society, 
the capitalist system. When the financial mechanism 
gives way under the strain of its inherent contradic- 
tions, the only remaining obstacle will have been 
removed to the social control of social production. 

Now, this commodity money, gold, is woefully 
insufficient in every country for the performance of 
its functions of medium of exchange and means of 
deferred payment, the latter being an additional 
function added in modern times. These two func- 
tions are again contradictory, but we need not enter 
into details at present. 

In spite of the tariff walls with which the capitalist 
countries have surrounded themselves, they were 
never so interdependent on each other as they are 
to-day. Especially are they all extremely sensitive 



10 Capital To-Day 

to any disturbance of a financial nature in one among 
them. This is so, because they all stand in relation 
to each other not only as sources of materials and 
customers for products, in spite of tariffs, but also 
because the money capitalists everywhere make 
their investments with little regard to country. 

All these countries are mortally afraid of parting 
with any material part of their stock of gold. This 
is largely concentrated in the central bank of each 
country, partly in order to sustain the social faith 
in the parity with it of various kinds of token money, 
and partly for the emergency of an adverse balance 
of international obligations. In some countries the 
central bank's gold reserve is looked on besides as a 
possible emergency fund in case of war to serve for 
the purchase in foreign countries of army supplies 
and foodstuffs. The business of the other banks 
consists mainly in receiving deposits and employing 
them as loan capital by discounting the bills receiv- 
able of manufacturers and merchants. 

When the alarm sounds, either in the due course 
of the cycle of crises, inseparable from competitive 
capitalism, or in consequence of the outbreak of war, 
the first thought of the productive and mercantile 
capitalists is to get possession of the money which 
they have on deposit in the banks. This cannot 
be done by drawing a check on the bank and deposit- 
ing the same in another bank. It must be drawn in 
cash. But the banks of deposit keep on hand as 
little unproductive money as possible and now turn 
to the central (national) bank for the re-discounting 
of their bulging portefeuilles. In an endeavor to 



Introduction ii 

keep the demand for re-discount within bounds the 
central bank doubles or trebles its discount rate. 
But the dire need of the banks of deposit breaks 
down this barrier and threatens to deplete the central 
bank of its holdings of paper currency and even of its 
gold reserve. At this juncture governments are 
obliged to decree the abrogation of laws fixing the 
limit of note issues by the central banks and to open 
the gates wider for the issue of fiat money which they 
endow with the quality of a forced currency. Under- 
standing well enough what a great inflation would 
mean to the national economy, if not to the social 
fabric, the governments reduce the need of money 
by decreeing moratoria, i, e., the suspension for a 
certain period of the legal enforcement of private 
money obligations, including bank deposits, except 
such percentage of the latter as may be fixed by 
governments both for commercial and savings banks. 
During the regime of the moratorium the further 
extension of merchandise credits must be in the main 
suspended, as it becomes too difficult to distinguish 
between the solvent and insolvent buyer. There- 
fore the moratorium actually means just this, that 
a great reduction of production is considered the 
lesser evil, compared with the widespread bankruptcy 
that would follow were payments to be enforced. 

The social faith in credit is shaken. There seems 
to be nothing real but gold. Everybody tries to 
hoard as much of it as possible. Paper money is 
looked at askance by many. On the stock exchanges 
paper titles fall tremendously. In his fear of much 
greater depreciation to come only one thought 



12 Capital To-Day 

obsesses the money capitalist: sell as quickly as 
possible! And the cables transmit an avalanche of 
selling orders to the New York stock exchange. 

Quickly the situation here likewise becomes criti- 
cal. What is to become of the value of our paper 
currency, if we are to ship gold against all the Ameri- 
can securities which Europe might be willing to un- 
load here? And if this debacle of quotations is to 
continue what is to become of the solvency of our 
banks, whose assets largety consist of, or have been 
loaned against, stock exchange securities — solvency 
not in the sense of the economist who knows that it 
cannot exist, who knows that insolvency is the normal 
condition of all banks in the world, but solvency 
according to the rules laid down for bank examiners. 
There is only one escape from these two terrible 
contingencies and their consequences — the annihila- 
tion of the market for securities, the closing of the 
stock exchange. 

But what a costly escape ! It resembles the Euro- 
pean escape by moratorium in that it is effected at 
the cost of a partial paralysis of industry^ The con- 
version, where needed, of revenue titles (stocks, 
bonds, short term notes) into money and as such 
into industrial capital, for which conversion the 
stock exchange is the agency, stagnates. 

The foregoing is far from being a vision of capital- 
ist society in its death struggle. It presents merely 
the sequence of the symptoms during an acute attack 
of a disease which is congenital to the capitalist 
system, from which the United States is not exempt, 
in spite of its industrial advantages. Every one of 



Introduction 13 

these symptoms has already been recorded in the 
history of crises. But the attacks of the disease 
must grow more virulent in the future under the 
growing strain of the contradictions of money. 

It follows, then, that the orderly development of 
capitalist society in the United States, while possible 
industrially, is dependent not only on the develop- 
ment of its own money system, but on that of inter- 
national finance. 

For an understanding of these subjects we must 
turn to Economics, the science which treats of the 
laws governing the production and exchange of the 
material means of life in human society. 



CHAPTER I 

ECONOMICS A SCIENCE 

In the realm of the natural sciences any new dis- 
covery must submit to the test of universally rec- 
ognized rules of proof, by means of which not only 
the result claimed but also the methods employed 
in arriving at the result may be verified. The re- 
quirements of these rules of proof serve to preclude 
any possibility of error, sophistry, or mystery, and 
that discovery which has stood the test is recognized 
by all men as an established scientific fact. Hence, 
while scientists may entertain different hypotheses 
regarding the problems on the solution of which they 
are engaged, there is no room left for individual 
opinions among them concerning the positive results 
already secured by the various natural sciences. 
There are no opposing schools of chemistry, as- 
tronomy, etc., and we do not read that in relation 
to gravitation or evolution Mr. A. holds one view, 
while Prof. B. differs from it, and Dr. C. denies 
altogether that such phenomena exist. 

All over the world the universities which are the 
appointed institutions for the dissemination of sci- 
entific knowledge teach the identical unquestioned 
facts, so far as the natural sciences are concerned. 

14 



Economics a Science 15 

In certain other departments, however, the univer- 
sities maintain courses of studies to which the appli- 
cation of the same rules of evidence as required in 
the case of the natural sciences is not enforced, but 
is allowed to go by default. Among these studies 
we single out Philosophy, History, and Economics 
as directly concerning us here. 

What is there behind this difference in the attitude 
of the world's universities toward the natural sci- 
ences on the one hand and toward the above-men- 
tioned three studies on the other hand? 

In the first place be it noted in regard to Philosophy 
that what the universities are teaching is not a history 
of the development and final positive outcome of 
this discipline, which would be a highly useful pur- 
suit, but they persist in teaching it still, the same as 
in former centuries, as a source of understanding. 
In other words the universities hold on to two sources 
of understanding, the scientific and the philosophic, 
and this dualism leaves them free to range the various 
studies under one head or the other. Thus, while 
having adopted the scientific source of understanding 
for each individual study treating of, or directly 
connected with, objects in nature, they have chosen 
to subordinate History and Economics to Philosophy, 
thus taking the ground, or at least implying, that 
these two disciplines, which treat of human society 
past and present, are not subjects capable of scientific 
analysis. 

Karl Marx has said that Economics is capable of 
being analyzed with the exactness of a natural sci- 
ence and he gave to the world the amazing proof for 



'i6 Capital To-Day 

this statement in his monumental work Das KapitaU 
in which the nature of the social processes of produc- 
tion and circulation, which together constitute the 
social alimentation, are disclosed. It is evident on 
every page that Marx consciously observed all 
rules of science, although he omitted to explain, just 
as all other great scientists have omitted to do, how 
the nature of the human mind is involved in scientific 
analysis or rather in human understanding generally. 
This missing feature in Marxism, in reality its foun- 
dation and that which renders its economic theory 
unassailable, was supplied by Joseph Dietzgen in a 
thorough and systematic manner in his two principal 
works. The Nature of Human Brain Work and The 
Positive Outcome of Philosophy, Therefore in order 
to realize fully the thoroughly scientific basis of Das 
Kapital as a product of thinking, it is necessary first 
to learn from Dietzgen what is correct thinking. 

For thousands of years men, in their longing to 
understand the world they lived in, and aware that 
their senses often deceived them, turned to ''pure 
reason," that is, reason uninfluenced by the senses, 
as the source of understanding. Mankind had not 
yet succeeded in supplementing and correcting its 
endowment of senses and their impressions by instru- 
ments and processes, more sensitive than the human 
sensory organs. For instance the gauging of tem- 
perature by our sense of feeling is largely subjective 
and always inexact, therefore unreliable; the inven- 
tion of the thermometer substituted for this purpose 
the sense of sight for that of feeling and made the 
measurement of temperature objective and exact. 



Economics a Science 17 

While thus the paucity of their experiences and 
the distrust of their senses caused the great thinkers 
to rely on abstract reasoning, the horizon of their 
thought processes was further limited by the social 
conditions with which they were surrounded and 
which they conceived as static, the same as they did 
all phenomena. These social conditions, ever since 
the commodity-producing society had evolved out 
of primitive communism, had presented a dualism. 
The Greek philosophers could not conceive of society 
as consisting of anything else than clearly defined 
classes — a leisure class to rule and think and a slave 
class to do the work. The essentially identical milieu 
of social dualism, although in modified form, governed 
the abstract thinking of the modem philosophers. 
The social dualism, conceived as eternal, has been and 
remains the fountain-head of all dualisms supported 
by the philosophers, such as mind and body, matter 
and force, ethical and unethical. Such an accepted 
and imquestioned dualism we find to-day in the phil- 
osophico -economic conception of capital and labor. 

As knowledge increased, the results arrived at by 
successive philosophic systems were successively 
found to be at variance with the facts of nature and 
of history. The sciences branched off from the 
parent philosophy, which originally included all 
intellectual activity, and they became specialized 
as distinct pursuits, each in its sphere setting up 
its own tests of truth. The successes of the sci- 
ences, contrasted with the unreliability and barren- 
ness of practical results of philosophic speculation, 
lessened the estimation in which the exercise of "pure 



1 8 Capital To-Day 

reason" had been held and reduced the function of 
philosophy more and more to an inquiry into the 
nature of the faculty of thought. This problem was 
finally solved by Dietzgen, whose work (first pub- 
lished in 1869) concludes the history of philosophy, 
now transformed into the natural science of the 
human mind. The transformation is analogous to 
that of alchemy into chemistry. 

The quintessence of science consists of the dis- 
covery that phenomena are not static and existing by 
themselves, but that they are in a constant change 
and exist only through the action of one thing on 
another. Thus it is not the static nature of a tree 
to be green; if we recede from it at a certain speed, 
its natural color is red, and at a certain greater speed 
the phenomenon of vision of the tree ceases altogether. 
Our senses are organs developed for the purpose of 
being acted on by other things. To our tongue 
vinegar tastes sour, but the phenomenon of acidity 
does not exist in the vinegar by itself. To our eyes 
vinegar is only either a liquid or a solid, according 
to the temperature; to iron or eggshells it is nothing 
but a solvent. 

The brain is an organ produced by evolution for 
the performance of one kind of work, as the legs are 
for another. The work of the brain and of the legs 
produce the same toxin of fatigue. We are as con- 
scious of our thinking, as we are of pain. As all 
phenomena consist of the action of one thing on 
another, work requires material to work upon. What 
is walking? It is the rhythmic movement of the 
legs on some solid substance from one place to an- 



Economics a Science 19 

other. The material for brain work is furnished by 
the perceptions of the senses. But each sense can 
only perceive that for which it has been adapted — 
the eye to see that which is visible in an object, the 
ear to hear that which is audible in it, etc. The faculty 
of thought, however, has everything for its object. 
Yet it is incapable of entirely dissociating the object 
from any connection with anything else, because 
phenomena consist of the relations of things with 
each other. These innumerable objects and rela- 
tions have the concrete quality of being perceptible 
by our senses, but they also have the abstract quality 
of being thought of and understood. If we now vary 
our above question regarding walking and ask: 
What is thinking? we can answer that it is the co- 
ordination or generalization of the perceptions of 
the various senses, including in these perceptions 
the faculty of thought itself as a material fact. 

Generalization, which includes simultaneously 
differentiation, is equivalent to systematization and 
is the essence of conscious, theoretical understanding. 
As soon as we have recognized the common charac- 
teristics (which includes recognizing their diverging 
characteristics) of salt, sand, and silver, we can 
generalize them all as minerals. If by the thought 
process, based on sense perceptions, we can identify 
profit, interest, and rent as differentiations of surplus 
value or unpaid labor, we have gained that much 
understanding of economics. 

Science consists of the generalization of concrete 
facts. Its mode of thinking is from the external, 
inward to the mind: it is inductive. Philosophy 



20 Capital To-Day 

draws its thoughts from the mind and applies them 
outwardly: its mode of thinking is deductive. Of 
course, do what they may, men cannot get away from 
the concrete basis of their thinking. They cannot 
think transcendental thoughts or create transcen- 
dental images. All they can manage to do is to 
produce arbitrary combinations. They can combine 
the human form with characters of animals and 
produce images of angels and devils, or fetiches 
before which they prostrate themselves. They can 
defend as absolute and final a form of society, even 
more sacred, composed of a strange trinity, — capital, 
not a thing at all, but a relation ; labor, an abstrac- 
tion; land, with its lingering odor of the forest 
primeval, — which trinity divides the social revenue. 
But this metaphysical defense cannot get away from 
the concrete facts that capital is only a form of 
ownership of the concrete means of production, that 
labor is only the ghost of concrete work producing 
use-values, not wages, and that the land is cheated 
of its share which instead goes to certain persons 
known as landlords. 

If, then, deductive thinking without previous 
induction is in reality a physical impossibility, if 
"pure reason" actually does not exist — then how is 
it that religion did, and the philosophical method 
does, arrive at untrue results? The answer is that 
these methods of thought use their inductions un- 
consciously, while the scientific method is critically 
inductive. Hence the materials the former work on 
are insufficient or incongruous, while science operates 
with materials brought together with proper discern- 



Economics a Science 21 

ment. Science is based on the theory of under- 
standing. Its method has system; the philosophical 
method has not. 

Philosophy had been striving for absolute truth 
by mere thinking. But science deals with phe- 
nomena and it has discovered that they are in a con- 
stant state of change, perishable and transitory, 
therefore imperfect and contradictory. How then 
could science by a study of phenomena hope to lead 
us on toward the goal: absolute truth? Only by 
directing to any phenomenon the questions as to its 
origin and its contradictions with other phenomena; 
in other words by applying the theory of evolution, 
and the materialistic and dialectic mode of thought. 
Thus it is found that all phenomena are different 
appearances of the interactions upon one another of 
the imperfect and transmutable parts of one whole, 
the all-embracing universe, the one perfect existence. 
This conception of phenomena and of the universe 
is confirmed in physics by the doctrine of the inde- 
structibility or eternity of matter and of the con- 
servation and transformation of energy. And this 
revelation reconciles all contradictions in time and 
space by resolving them into ever more widely valid 
truths and disposes of the dualisms which were the 
bane of philosophy. 

For instance, if we dip a straight, rigid stick into 
a brook, we see plainly that the submerged part is 
deflected at an angle. Again, nobody can point 
to anything but human labor as endowing with an 
exchangeable value the things existing in nature. 
Labor, therefore is the sole source of value; yet, the 



22 Capital To-Day 

laborer, under the capitalist system of production, is 
compensated for his labor with only a part of the 
value he creates, which part appears in the form of 
wages. We have here the phenomenon of the an- 
gular stick and the wage presenting contradictions 
with the straight stick and value. The former are 
just as true phenomena as the latter. But as all 
phenomena are true only within the special relation 
of two things, hence only within certain limits, we 
must guard against assigning to any single phenome- 
non a more general significance than warranted by 
sense perceptions produced under special conditions, 
lest instead of gaining general truths we fall into 
dangerous untruths. What is proclaimed as eternal 
morality at one time becomes the reverse at another, 
or vice versa; institutions good for one class may at 
the same time be bad for another class. Similar 
errors would be committed by one who, on the basis 
of limited sense perception, would pronounce the 
crooked stick and wages general and permanent, 
instead of special and temporary, phenomena. The 
dialectic, scientific method of thought seeks the 
contradictions and reconciles them in higher truths, 
in the same manner as it resolves the contradictions 
between the crooked and straight stick and between 
wages and value in the higher truths of optics and 
economics, respectively. 

The progress of understanding is based on the 
faculty of thought, proceeding from the concrete and 
multiform to the general and harmonious on a con- 
stantly higher and broader plane of truth. Before 
this progress vanish all dualisms of philosophy, yet 



Economics a Science 23 

by its very nature science never claims finality for 
its results, as it was in the nature of philosophy to do. 

As the sun begins to shed light before it rises above 
the horizon, so the coming form of society, before 
its realization, announces its advent by the procla- 
mation of its monistic mode of thought, presaging 
the complete disappearance of all dualisms, along 
with the fundamental dualism of social classes — fun- 
damental, because the material conditions under 
which men live, especially the economic, have in all 
ages formed the groundwork of their ideology. 

Now, every student of Marx's Capital knows that 
there is not a sentence in the whole stupendous work 
not based, in concrete statement, on sense-percep- 
tions, nor a single abstract statement which is not a 
generalization of those same sense-perceptions. This 
is all that any discipline can be required to prove in 
demanding a charter as a true science. 

But Economics, as expounded by Marx, is able to 
do better than that, in contrast to some of the so- 
called natural sciences. In a wider sense Economics 
is a natural science, its subject-matter being the 
naturally evolved economic status of the human 
species in former ages and to-day. Geology, for 
instance, of unquestioned standing as a science, 
teaches us on the basis of sense-perception that there 
have been periods of subsidence and elevation of the 
land, and periods of advancing and retreating glacia- 
tion, but it cannot prove these facts by experiment. 
On the other hand every sense-perceived economic 
phenomenon treated or mentioned in Capital is 
capable of demonstration by actual experiment. 



24 Capital To-Day 

Why, then, this strange indifference on the part of 
the governing bodies of the universities toward 
Marxian Economics? Are they so httle interested in 
finding out whether Economics is still the sporting 
field of individual opinions and philosophizings as 
of yore, or whether there has not arisen in the mean- 
time a science of Economics? Is there anywhere a 
university that still maintains alchemy against 
chemistry or astrology against astronomy? 

A page in history tells of a situation quite analogous 
to the present one under discussion and furnishes 
an answer to the above questions. 

During the whole long period of the struggle of the 
aspiring burgher class against feudalism, of which 
the Church was the main prop and beneficiary, the 
former had an interest in the cultivation of the 
natural sciences for the reason that they were means 
for its own enrichment, while at the same time serv- 
ing as mental weapons with which to overcome the 
Church. As commerce chronologically preceded 
modern industrialism, so astronomical and geograph- 
ical discoveries, mainly useful to the former, pre- 
ceded the discoveries in physics, chemistry, geology, 
etc., which were profitable in the manufactures 
stimulated by those previous geographical discoveries. 
But the Church, representing the feudal privileges and 
seeing them menaced by the revolutionary burgher 
class and its new knowledge, tried to prevent the 
spread of the sciences by all means at its command. 
Copernicus, even though he did not live in Rome, 
but in Koenigsberg, Germany, did not dare pub- 
lish his work in his lifetime. What befell Galileo 



Economics a Science 25 

everybody knows; many *' heretics'* fared even 
worse. 

Feudalism was overthrown. What was the revo- 
lutionary class is now the ruling class, itself confronted 
by a new revolutionary class, the modern proletariat. 
What religion was to feudalism, philosophy is to 
capitalism. It may be objected that capitalism does 
not take philosophy very seriously. That may be 
true, as capitalism, revolutionary in its innermost 
nature, has not much reverence for anything and 
takes nothing very seriously except profit making. 
But it must maintain philosophy in its universi- 
ties as a theoretical ground on which they can re- 
fuse admittance to genuine History and genuine 
Economics. 

Real History, as well as the knowledge we possess 
of the advance of humanity from savagery to bar- 
barism and from that stage to civilization (thanks to 
the researches to which Lewis H. Morgan so fruit- 
fully devoted his life and which have cast light on the 
origin of the family, private property, and the state), 
can have no other logical interpretation than in the 
light of the material conditions of existence, chief 
of which are the modes of production and distribu- 
tion of the necessaries of life. It teaches the rise 
of the ruling classes as useful new organs of society, 
the ultimate atrophy of these organs consequent to 
their having become useless, and their substitution 
by new ones historically prepared to assume the 
task of leading the race forward on the path of 
progress. 

These two sciences, then, History and Economics, 



26 Capital To-Day 

which proclaim in our day the early advent of a new- 
social order, are barred from the universities together 
with the foundation of these sciences, the monistic 
Theory of Understanding. Instead they cultivate 
under the protective wing of speculative philosophy 
such studies as speculative sociology, speculative 
psychology, speculative logic, speculative economics, 
and a kind of history of which the facts are largely 
irrelevant and incoherent and always unexplained. 

What has been said regarding the attitude of the 
universities toward History and Economics should 
by no means be taken as a polemic directed at these 
institutions. Either our colleges are state insti- 
tutions, and the state, while theoretically represent- 
ing the whole nation through universal suffrage, 
actually represents only the interests of the capitalist 
class so long as the working class is not yet class- 
conscious; or else they are founded and endowed by 
individual capitalists, and there the control is even 
more direct. In either case it would be foolish to 
expect or ask the universities to help in undermining 
intellectually the class to which belong their financial 
backers as well as the bulk of the student body; 
moreover it would be contrary to the lessons of his- 
tory. Scientific Economics never will be taught 
within the universities, while the state remains a 
class state, though millions may be familiar with its 
conclusions outside. 

The purpose of these introductory paragraphs has 
been to convince the reader that the validity of 
Marxian Economics is not impaired because the 
universities choose to ignore its existence. There- 



Economics a Science 27 

fore that fact should not deter from the frank ap- 
proach of the subject any person wilHng to think 
for himself and sincere in the desire to learn what is 
the origin of our present form of society, what are 
the laws underlying its system of production and cir- 
culation, and whether these laws tend to give birth 
to a different form of society, independent of the 
will and purposes of men. 

The foundation of Marxism is the Theory of Value 
of which we shall give a brief outline in the next 
chapter. 



CHAPTER II 

MARXIAN THEORY OF VALUE BRIEFLY STATED 

The wealth of society, under the capitalistic 
system of production, appears as an immense col- 
lection of commodities, the single commodity being 
its elementary form. 

To be a commodity a thing must present at the 
same time two phenomena : that of being a use-value 
and that of being an exchange-value. 

Use-value is the generalization or abstraction of 
things as regards their concrete relations to human 
uses by reason of the individual, physical or chemical, 
properties of each thing. Use- value therefore is the 
natural form of things and remains identical in all 
forms of society. 

Exchange-value is the generalization or abstrac- 
tion of things as regards their concrete relations with 
each other in the act of exchange in which the things 
are represented by their owners. Exchange- value 
therefore is the social form of things and exists only 
in a commodity-producing society. 

As use-values commodities are qualitatively differ- 
ent from each other and therefore cannot be brought 
into relation with each other. 

As values (this term will be used in these pages 

28 



Marxian Theory of Value Stated 29 

hereafter for exchange-value) commodities are quali- 
tatively alike and can be brought into relation or 
equated with each other. 

The quality which, as values, makes all commodi- 
ties alike, is the concrete substance common to them 
all and generalized as abstract human labor. 

The abstraction "human labor" is derived from 
concrete labors, such as weaving or mining. When we 
touch a table we touch the union of the concrete 
labors of the woodman, cabinetmaker, etc., with 
nature. Labor is the father, nature the mother. 
Her gifts are gratis and do not enter into the deter- 
mination of value. 

The unit of abstract labor is common labor. 

Common and complicated labor are equated with 
each other, both being qualitatively comprised in the 
abstraction "human labor" and differing only 
quantitatively, complicated labor figuring as a multiple 
of the unit. 

Commodities, then, being qualitatively connatural 
as values, can be related and are related to each other 
quantitatively, viz., as to the quantity of labor em- 
bodied in each. This quantity is measured by the 
time socially necessary for the production of each 
commodity. 

We now know that — 

The substance of value is labor. 

The measure of value is labor-time. 

What remains to be analyzed is the form of value 
in the act of exchange. 

The most simple expression of this form is the rela- 
tion between two commodities; but this simple rela- 



30 Capital To-Day 

tion must cover the mystery of all forms of value, 
the relation of many commodities to one, and the 
outcome of this latter relation: the money form of 
value. Let us take as an example for the simple 
form of value : 

20 yards linen = i coat, or 20 yards linen are worth 
I coat. 

In Chapter I. the general scientific principle has 
been mentioned that phenomena consist of the action 
of one thing on another. In this action one thing 
may be considered as the subjective or active, the 
other as the objective or passive element. In our 
own case the phenomenon of value arises by the linen 
comparing itself to the coat. 

By expressing its value relative to the coat, the 
linen places itself in the subjective or Relative Form 
of Value, 

The coat, serving as material for the expression of 
the value of the linen, finds itself in the objective or 
Equivalent Form of Value, 

Both forms are inseparably linked together in the 
equation. 

On the other hand they are mutually exclusive 
poles of the equation. The relative form of the 
value of the linen supposes a different commodity 
to be in the equivalent form. That different com- 
modity, the coat, cannot at the same time be in the 
relative form of value. It is not its own value 
which is to be expressed. 

Of course the equation may be inverted: i coat 
= 20 yards linen ; in which case the coat is in the rela- 
tive, the linen in the equivalent form. Or both com- 



Marxian Theory of Value Stated 31 

modities may be simultaneously in the relative and 
equivalent forms of value, but merely so from the 
point of view of each commodity, not simultaneously 
in one expression of value. 

We have seen that all commodities are alike as 
connatural and commensurable, and thus exchange- 
able values. The possibility of exchanging commod- 
ities therefore rests on our regarding them only in 
reference to the one substance of which they all 
consist, namely, abstract human labor, and by dis- 
regarding them as to the various concrete labors by 
which they are individually produced and which 
impressed on them their individual characters as 
use- values. 

In proceeding thus, however, we encounter a con- 
tradiction v/hich must be overcome. Abstract human 
labor is a creature of the mind, but commodities 
are concrete things, the products of concrete labors, 
such as weaving and tailoring. Their value consists 
of course of the labor spent, but that value is not 
reflected in their physical existence, wherein they 
are only use- values. It is only revealed by one com- 
modity entering into a value relation with another 
commodity. 

But there can be no phenomenon outside of mate- 
rial things, and the material existence of the linen, 
which is naturally nothing but a use- value, has been 
disregarded in the inquiry concerning its value. 
This material existence as a value, missing in the 
linen, has been supplied by the coat as the equivalent 
of the linen. Thus the coat becomes the substan- 
tiation of the value of the linen, the value form of the 



32 Capital To-Day 

linen, as apart from the material existence of the 
linen . 

If any two commodities are compared with each 
other merely in their quantitative relation, the only 
result is the determination of their relative values. 
But if we realize the qualitative side of the comparison, 
whereby the natural form of one commodity becomes 
the value form of the other commodity, we discover 
in the simple expression of value the secret of money. 
To clothe this theory in illustrative form : 
The coat which is in the equivalent form of value 
is not itself the subject of inquiry as to its value. 
There lies the coat in its natural form of use- value, 
the product of tailoring, concrete labor. Just as it 
is, it is to be used as the mirror of the value of a 
different commodity. Without changing its physi- 
cal existence, it now appears no longer as use-value 
or the product of concrete labor, but as the product 
of abstract human labor and the embodiment of the 
generalization ** value." Being value materialized, 
the coat is also the materialization of the value of 
the linen. It is the sense-perceived form of exist- 
ence of the value of the linen. Thus the linen gains 
a form of existence as a value which is different from 
its natural form and of which the magnitude is meas- 
ured by its proportion to the coat. That is, the 
linen has no other way of expressing its own value 
than by referring to a definite quantity of the use- 
value "coat" as representing a given quantity of 
human labor. The equivalent form does not in fact 
include quantitative definiteness, except in so far 
as called forth by statement of the quantity of the 



Marxian Theory of Value Stated 33 

commodity in the relative form of value. It does not 
include definiteness as to its value quantity. The 
coat is entirely Dassive, not seeking to ascertain its 
own value. It is proud to be a mere use-value and 
as such directly exchangeable with any commodity 
whatever, without being required to legitimatize 
itself. If the value of coats changes, so will the 
relation to it of linen, but the latter cannot form this 
new relation, unless the value of coats is a given 
quantity. 

When a commodity is recognized in relation to 
other commodities as a universal equivalent, it is 
directly exchangeable with them, which means that 
it is so exchangeable without being required to first 
express its own value in something else. In this way 
the natural form of the commodity so recognized, 
namely that of a use- value, is transformed into its 
exact opposite; it becomes the materialization of 
exchange- value. It is now nothing but exchange- 
value. But this holds good for such commodity 
only within the value relation, in which it functions 
as the general equivalent; outside of the same it 
remains a simple commodity with all the attributes 
of such. 

As such commodity, whether it be a coat or gold, 
develops into the form of being the substantiation 
of value, so does of course the concrete labor by which 
it is produced assume the form of substantiation of 
abstract labor. And on account of the social func- 
tion of the commodity which is in the equivalent 
form of value, the production of such a commodity, 
which is directly exchangeable, assumes the char- 



34 Capital To-Day 

acter of directly social production, although con- 
ducted by private persons for their own profit, 
whereas the production of commodities in the rela- 
tive form of value is only indirectly social, these being 
only indirectly exchangeable. 

This r61e of a commodity in the equivalent form 
of value may be illustrated by an analogous r61e of 
a commodity in the equivalent form of weight. To 
ascertain the definite weight of a loaf of sugar we 
equate it with stamped iron weights. Iron is no 
more the concrete form of gravity than sugar, but 
the former has come to be adopted as the embodi- 
ment of weight, all its other physical qualities being 
disregarded and its weight relation to other things 
being considered exclusively. As the iron is to the 
sugar nothing but weight, so the coat is to the linen 
nothing but value. 

In the statement : 20 yards linen = i coat there is 
expressed, as regards the linen, that it is first a use- 
value (linen), secondly an exchange-value (some- 
thing akin to the coat), thirdly a union of both — 
consequently that it is a commodity as defined at 
the beginning of this chapter. 

A product of useful labor is naturally a use- 
value. 

To become a commodity it needs the additional 
character of value, which it cannot possess in an 
isolated state. The material existence of its value 
is supplied by another commodity. 

The development of the commodity form includes 
that of the value form. The development of the 
equivalent form of value is the expression and result 



Marxian Theory of Value Stated 35 

of the development of the relative form of value, as 
we shall presently see. 

The simple value relation between two commodi- 
ties has been analyzed as the contradiction between 
use-value and non-use- value (exchange value) inher- 
ent in the commodity and as the polarity of two 
different kinds of commodities. 

This simple form of value corresponds to that stage 
in history in which exchanges were only occasional, 
but it contains the germ which through a series of 
metamorphoses led to the price form. 

The inadequacy of the simple form of value as an 
expression of value in general is apparent, just as 
would be any limited phenomenon for the enuncia- 
tion of a general truth. The proportion in which 
two commodities exchange with each other might 
be accidental. 

With the production of a particular thing in excess 
of the needs of the community, as for instance of 
sheep in the case of nomads, the surplus seeks ex- 
change with foreign products. Hence arises the 
necessity of comparing the relative value of one 
product with a multiplicity of equivalents. These 
appear as so many simple expressions of value; in 
point of fact it is the sum of the single expressions of 
value which constitutes the expanded form of relative 
value^ viz.: 



20 yards linen 



I coat 
I ton iron 
ID bushels wheat 
J oz. gold 



36 Capital To-Day 

Now, indeed, the value of the linen appears as the 
substantiation of abstract, undifferentiated human 
labor, the equal of every kind of concrete work. It 
is seen at the same time that the production of J^ 
ounce of gold requires as much labor as five bushels 
of wheat. 

But this form of value is still imperfect, first, 
because every commodity differs from every other 
in the expression of its relative value; secondly, 
because the expression of relative value is endless 
owing to the constant appearance of new products; 
thirdly, because of the limitation as a value expres- 
sion of each product in the equivalent form of value, 
which products in this position mutually exclude 
each other — ^hence a complete lack of unity in the 
expression of value; fourthly, because the list of 
equivalents never ends. 

When the production of some specialty for the 
express purpose of exchange has reached a certain 
volume, the owners of the variety of commodities 
acquire the habit of expressing their value in terms 
of the overshadowing specialty, thus : 



I coat 
I ton iron 
10 bushels wheat 
I oz. gold 



■ = 20 yards linen 



They have arrived at a general form of value in its 
simple expression, i. e., in one exclusive commod- 
ity, and in its uniform expression, which enables 
all commodities to compare their values with each 
other. In other words they have arrived at a general 



Marxian Theory of Value Stated 37 

social form of value. The polarity of the simple form 
of value, which had been merely formal, has now 
acquired objective consistency and social validity. 

During the historical processes many commodities 
have served as general equivalents within a greater 
or narrower circle, but finally gold, from having 
been a simple commodity, then a money commod- 
ity, alongside of others, conquered the position of 
monopoly as the world's one general equivalent, 
— the thing that can directly buy anything any- 
where. The evolution has carried us to the money 
form of value, like this: 



20 yards linen 

I ton iron 
10 bushels wheat 

I coat 



. = J oz. gold or $10 



While the weaver may have expressed in terms of 
linen the value of all commodities, including that of 
the coat, the money form of value changes his indi- 
vidual and subjective mode of expression of value 
to a socially objective mode in the price form. Pre- 
vious to such social expression of the value of pro- 
ducts, as the embodiment of undifferentiated human 
labor in a single material, no perfect form of commod- 
ity could exist and therefore no world market. The 
value of a commodity expresses the relation of the 
necessary, normal labor time which must be spent 
in its production to the social labor time. The 
accident of a crop above or below the average affects 
temporarily the price of the particular product, but 
not its value in so far as there is no permanent change 



38 Capital To-Day 

in the time necessary for the production of a given 
quantity of that product. It follows that if the 
average price of any product for a number of years 
be taken, this average is likely to be fairly indicative 
of the value. 

Furthermore, in the capitalist system of society 
the economic equality of the workers of the pre- 
capitalist era is supplanted by the economic equality 
of the capitalists which decrees the principle: ''equal 
profit for equal capital," and enforces this in industry, 
commerce, and finance, as long as free competition 
survives in any of these spheres. This means that 
capital, instead of labor, has become the decisive 
factor. No longer the quantity of labor incorporated 
in a commodity, but the cost of production deter- 
mines the price. Hence the tendency of competing 
capitalists to reduce the cost of production by increas- 
ing the labor of the workers. 

In such industries in which the competitive stage 
of capitalism is already passed, the price of a com- 
modity is also not determined by the quantity of 
labor incorporated in such commodity, as in pre- 
capitalist days; nor is it determined by the cost of 
production, as in competitive capitalism. The price 
now becomes purely arbitrary within the limitation 
of "what the traffic will bear," to use an expression 
which has become famous. 

Finally price in certain cases loses all connection with 
value and becomes purely imaginary, as in the case 
of land, which, not being a product of labor, has no 
value, or when we speak of the price of a man's honor. 

The economic fact that the two phases of capitalist 



Marxian Theory of Value Stated 39 

society have evolved their own methods of deter- 
mining price, both in disregard of value, is a nega- 
tion, but not an annulment of the theory of value, 
precisely as the optic fact of the bent stick in the 
brook, to recur to an illustration used in the previous 
chapter, fails to disprove the rigidity of the stick. 
The determination of price under capitalism on prin- 
ciples other than value merely indicates that the 
exchange of equivalents is not the essential charac- 
teristic of the commodity-producing society. Only 
during its pre-capitalist phase, owing to the social 
equality of the members of society, all working under 
equal conditions of production as owners of their 
simple tools, price was equal to value. Hence this 
phase is the starting-point for an inquiry into the 
modifications of the conditions which have resulted 
in the divergence of price from value. With the 
transformation of the independent workers into the 
modern proletariat, their labor power, bought by 
the capitalist's money, became capital while in the 
possession of the latter, the same as any other com- 
modity he had bought. Therefore the product was 
no longer the fruit of labor, but of capital. It be- 
longed to capital and its price was determined by the 
conditions of capital. 

The former social equality had given way to social 
inequality. But exchange is a relation of equality. 
This necessary equality appeared now as that of the 
capitalists, who, in free competition for the spheres 
of investment, worked out a general profit rate for 
all capital. At the same time uneven technical 
progress in different industries and uneven intensity 



40 Capital To-Day 

of labor, even as between individual capitalists in 
the same industry, resulted in uneven productivity 
of labor, therefore in uneven cost of production. 

Commodity production, in spite of private prop- 
erty and individual initiative, is essentially social 
production. Commodities are produced for the 
social alimentation under a system of social division 
of labor. Exchange of the products is the social 
fact without which there would be no economic soci- 
ety, no value, and no theory of economics. The 
responsibility of the individual producer consists in 
the relation of his product to the social need. Only 
socially necessary labor counts, both in relation to 
the state of social efficiency in production and to the 
total quantity of a given product socially required. 

In capitalist society social efficiency is gauged by 
reduced cost of production. The average cost of 
production, regardless of quantity of labor, deter- 
mines price and average profit rate. The equation 
is no longer: for value equal value, but: for equal 
capital, equal profit. 

It follows from the foregoing considerations that 
in all forms of the commodity -producing society the 
essential basis of exchange is not the equivalent of 
commodities, but socially necessary labor. 

After society has duly and to the best of its ability 
compared the individual product in its relation to the 
social requirement, it either confirms to the producer 
that the labor embodied in his product was "socially 
necessary," in the double sense here given to this 
expression, by allowing him for it in full the socially 
recognized equivalent, money; or, if the (otherwise 



Marxian Theory of Value Stated 41 

useful) commodity has been produced in excess of 
the social requirement or imder subnormal conditions 
of efficiency, society reduces the sum allowable for 
it to the average of socially necessary labor. 

But society is doing neither the one thing nor the 
other consciously by fixing the quantity to be pro- 
duced of each variety of useful things, or the labor 
time to be devoted to the production of each. Pro- 
duction being induced primarily by the needs of the 
individual, although ultimately social in character, 
the social will enters only into play subsequently 
to the fact of production and makes its laws felt 
only indirectly in the process of exchange of commodi- 
ties. The exchange itself is only a relation of things, 
not of collectively conscious persons. The indi- 
viduals representing the things become cognizant of 
the social will only by the effected exchange which 
enables them to proceed with reproduction. The 
social coherence of the commodity -producing society 
being only a relation of things, it can do no more 
than clothe one special thing with absolute social 
power to express the social recognition of each sepa- 
rate commodity as socially necessary labor. This 
special thing is money. It goes without saying that 
money was likewise no conscious social creation, but 
a form developed by one particular commodity in the 
course of the development of commodity production 
in general. That money must be a thing of value, 
representing general labor time, is founded on the in- 
nermost nature of the commodity -producing society. 

Money is the absolutely social form of wealth. It 
can readily buy every other form of wealth. Therein 



42 Capital To-Day 

lies its power. Its erstwhile social function has been 
converted by the logic of history into private power. 
From having been a handmaiden of the commodity, 
money has become its master. No profit, no pro- 
duction ! All this has come about because what is at 
bottom a social relation of men has taken the form 
of a relation of things. They control. Man merely 
represents them, his ownership is only a juridical 
relation, a mere reflection of the economic relation 
of things. He is controlled. Gold is the exclusive 
thing of things, because it is the incarnation of all 
labor. It appears as a fetich created by man's 
hands, ruling him in his material affairs, as the cre- 
ations of his mind rule him in religion. A period of 
unemployment sets in for the workers. The Fetich 
wills it! Vocational disease attacks the breadwin- 
ner. The Fetich wills it! The storm clouds of 
panic gather over the heads of the capitalists. Like 
a desperate wolf the creditor flies at the throat of the 
debtor. What! — commodities? What! — ^personal 
honesty? They are all sham. There is nothing real 
but gold ; there is no protection but the Fetich ! But 
the real fetich is not the yellow, glittering gold which 
dazzles the eyes : behind it, more concealed from view, 
is the arch-fetich, its parent — the commodity. 

Man's emancipation from his fetich, which will 
be accomplished by his passing out of the commodity- 
producing form of society, means that he has ceased 
to be the unconscious object of evolution and that 
he has arrived at the point when he will be the master 
of his destiny. With that he passes definitely out of 
the animal kingdom : the free mian. 



CHAPTER III 

THE CONTRADICTORY FUNCTIONS OF MONEY 

a. Circulating medium. 

Most of the more desirable or valuable commod- 
ities seem at one time or other, and in one part of 
the world or other, to have officiated as general 
or at least widely accepted equivalents and even, 
in certain cases in comparatively recent times, as 
lawful money. Thus in our own country tobacco 
was legal tender in Virginia during the first half of the 
seventeenth century, while wampum shells officiated 
as general equivalent between the Indians and 
whites of the Northeast, and were even for a short 
time legal tender for a limited amount in Connecti- 
cut. These shells were a use- value to the Indians 
for ornamentation and to the whites by their conver- 
tibility into furs, having in the latter respect a certain 
resemblance to our present-day circulating medium 
made of intrinsically worthless paper. With the 
decline of fur catching and the counterfeiting of the 
black shells (one worth two white ones) by the white 
men, wampum lost its use-value for both sides and 
therefore its exchange- value. Even very recently 
among the Indians of British Columbia ''Haiqua- 

43 



44 Capital To-Day 

shells worn as ornamental borders to their dresses 
serve them also as currency to trade with, — a string 
of ordinary quality being reckoned as worth one 
beaver's skin. "^ 

In general the tendency has been toward the in- 
creased use of the metals as money, and, with increas- 
ing wealth, toward the displacement of the cheaper 
and less suitable metals like iron, lead, tin, and cop- 
per by the more precious and eminently suitable 
metals silver and gold. 

In the long process of selection of one material to 
the position of world-money, gold won by its natural 
qualities, as soon as it existed in sufficient quantity. 
This metal, besides being of beautiful and unchang- 
ing color and luster, the only yellow one, and having 
the power of resisting oxidation, has remarkable 
properties of malleability and ductibility. One 
grain of gold has been beaten out to the extent of 
75 square inches, so that 367,650 leaves were only one 
inch in thickness or the 1200th part of ordinary 
printing paper, although in practice only about two 
thirds of this tenuity is made use of. Gold is so 
extremely ductile that one grain may be drawn into 
a wire 500 feet long, and one ounce made to cover a 
silver wire 1300 miles long. It established itself as 
a universally coveted use-value in being the raw 
material for articles of adornment of places of wor- 
ship, palaces, and tombs, and for personal ornaments. 
The quality, however, which pre-eminently adapts 
gold for the r61e of world-money is its homogeneity, 
which makes it easy of standardization, divisible into 

' E. B. Taylor, Anthropology. 



Functions of Money 45 

minor quantities which are again fusible into larger 
bulk. 

Gold is now the sole international money as well 
as the basis of value of all national systems of cur- 
rency, except in China, which has no national mone- 
tary system, silver being, however, the only money 
or general equivalent in use (aside from copper) . 

Economists ascribe the origin of money to the 
difficulties of barter, considering money a cunning 
device to overcome them. Commodities as use- 
values cannot be subdivided at will — a property 
which they should possess as exchange-values. 
Economists do not notice, or they fail to elucidate, 
the contradiction between the two characters inherent 
in the same thing. Sufficient for them that money 
has overcome the particular difficulty referred to, as 
well as others of similar nature, — for instance that a 
commodity offered by A in exchange for another 
belonging to B may not have use-value for the latter. 
Money, for which gold was the natiu-al material by 
reason of its homogeneity, divisibility, indestructi- 
bility, gravity, and other exceptional properties, is 
the result of the evolution of a pre-existing rudi- 
mentary form, similar to the evolution of other 
institutions, or of the categories of biology, and 
the necessity for it developed with the production 
of commodities instead of mere use- values. Con- 
crete work became abstract social labor, homogeneous 
and divisible into units of universal labor-time. But 
as the production of commodities is not directly 
social labor, or the labor of associated individuals, 
and is only indirectly social through the universal 



46 Capital To-Day 

alienation of the products of private and uncontrolled 
producers, the social validity of their labor could be 
confirmed to them in no other way than by giving 
them an equivalent representing social labor-time 
and therefore exchangeable for any existing com- 
modity in any quantity desired. Without such 
social equivalent there would be no exchange 
value, without exchange value no commodities, 
without commodities no capitalistic mode of produc- 
tion. As long as this mode of production exists, 
*'the antagonism of commodity and money is the 
abstract and general form of all antagonisms with 
which the capitalistic form of labor is pregnant,"^ 
because commodity stands for private production, 
and money for the social form of labor-time. 

Gold is the crystallized form of the exchange value 
of concrete commodities of which the abstraction is 
expressed by the word ''wealth." Every com- 
modity satisfies only one particular want, but gold 
satisfies every want. Therefore gold is the material 
form of the abstraction "wealth." But the quanti- 
tative limitation of the material is in contradiction 
with its qualitative universality, — a stupendous fact 
which will receive due attention in the course of this 
volume. None the less does it appear that "the< 
universal product of the social process, or the social 
process itself as a product, is a peculiar natural pro- 
duct, a metal hidden in the bowels of the earth and 
extracted therefrom. " ^ 

^ A Contribution to the Critique of Political Economy, by Karl Marx. 
Translation by N. I. Stone, p. 122. 
* Ibid., p. 212. 



Functions of Money 47 

The fact that the money form of value is derived 
from the commodity form is evidenced by the fact 
that the unit value of the precious metals, previous 
to their coinage, was weight, generally the pound 
silver. Instance the pound sterling, now a mere 
name having no relation to the substance, or the old 
French livre, debased by the progressive counter- 
feiting by the kings during centuries up to the 
Revolution to one seventy-eighth of its original 
value, so that 8i livres were taken as the basis for 
80 francs, the new coin of the Revolution. Even 
to-day (or at least until a few years ago) bulk silver 
circulates as a money commodity in China — the 
sycee, which for easier circulation is assayed by 
some well-known merchant who impresses his stamp 
on it. This is recognized within a narrower or wider 
circumscription until the sycee finds its way into re- 
gions where this merchant is not known, when another 
reputable merchant repeats the assay and stamping. 

To the state, as the highest manifestation of 
social consciousness so far attained, has been assigned 
the function of determining the technical details 
of the issue of money and its legal status between 
the citizens of the state. It has not arbitrarily 
selected either the material which was to constitute 
money, nor has it endowed it with various functions 
and characters, as for instance the potential char- 
acter of capital. The material of money, as well as 
its functions and character, are the results of econo- 
mic evolution subsequently recognized by the state 
and fixed in law, as all accomplished facts in social 
evolution have always been. 



48 Capital To-Day 

In coinage the state departed from the weight 
unit, issuing pieces of a convenient weight and fine- 
ness. In these respects as well as in the national 
dress in which they all appear, they differ from 
each other in the various countries, but they all 
perpetuate, so far as gold is concerned, the principle 
of weight and fineness, viz. of exchange-value, in 
their conventional units. 

Gold being ill adapted for denominations below 
a certain bulk, the necessary circulation of such 
smaller denominations is effected by subsidiary coin 
of less than face value in gold and made of silver, 
copper, or a nickel alloy. Such we find in the United 
States in the silver "Standard Dollars" or the stor- 
age certificates of such dollars, called silver certifi- 
cates. They are of much less than their face value 
in gold, with which they have nevertheless so far 
remained on a footing of equality as a circulating 
medium within the boundaries of the country. All 
coins, whose intrinsic or bullion value is less than their 
face value, are not money in the historical and theo- 
retical sense of the word, but only tokens of money 
(gold). Failing to maintain themselves as such, 
they become tokens of value in general down to the 
minimum given by their own values as commodities. 
As tokens they will be considered more in detail in 
future chapters. 

Fractional currency is generally a token of nominal 
value and in the United States consisted for a num- 
ber of years after the Civil War almost entirely of 
paper slips which answered the purposes of retail 
trade and were only inconvenient from becoming 



Functions of Money 49 

crumpled and dirty and being easily lost. Fractional 
currency is coined only to the extent of its require- 
ment in retail trade and is legal tender only for a very 
limited amount. 

For the settlement of international trade balances 
or for international loans there is recognized no 
money but gold (bars or coins) by weight 

h. Measure of value. 

Gold, being the universal equivalent, has no ex- 
pressed value, unless it were to be stated in terms of 
all kinds of commodities by placing them all in the 
equivalent and gold alone in the relative form of 
value. The measure of the value of gold itself, like 
that of every other commodity, is the labor time i 
necessary for its production. The equation of its ^ 
value with commodities is made by barter at the f 
mines, but part of the gold not so disposed of may ^ 
be sent to the nearest mint for coinage, whereupon 
its value is given. 

Commodities appear on the market in a double 
form: in their concrete form they are useful things, 
in their abstract form they are values. This ab- 
straction is by social agreement represented in con- 
crete form by gold. The value of the commodities 
exists therefore merely abstractly in the imagination 
of their owners as an equally imagined quantity of 
gold until by the act of sale the abstract value of the 
commodity is realized by and assumes the concrete 
value form of money. It is in this abstract form 
that money, or a quantity of gold, serves as the 
money name or price of a commodity. 

4 ^ 



50 Capital To-Day 

Commodities and money, then, confront and com- 
plement each other in the process of exchange as 
follows : 

Commodities 

concrete — objects generalized as use-value 
abstract — objects of ideal exchange-value 

Money 

concrete — embodiment of exchange-value 

abstract — expression of prices, namely, ideal use-value 

A change in the value of money can arise only 
from a change in the labor time required in mining 
a given quantity of gold. Such a change does not 
interfere with the usefulness of gold as a measure of 
value, since all commodities are affected alike. While 
commodity prices advance or decline, according to 
the increase or decrease of their own value, they may 
also do so inversely to the change of value of money. 
This statement by no means precludes the possibil- 
ity of a number of commodities remaining at station- 
ary prices, if their value changes are in the same 
direction as those of gold and are proceeding in the 
same tempo. 

The usefulness of gold as the measure of value, in 
spite of the variations in its own value, is due to the 
fact that its supply has never been equal to the 
demand and that therefore this commodity could at 
all times and everywhere be relied on as being ac- 
ceptable in exchange for any other commodity. 



Functions of Money 51 

But scarcity, a necessary condition in any com- 
modity for the money function of measure of value, 
is a contradiction to the requirement of abufidance 
of money as means for the circulation of the stock 
of commodities. Yet the two functions are insep- 
arably united in the same money commodity. 

This contradiction did not give rise to any serious 
economic problem so long as the production of 
commodities had only partly displaced production 
by the community or family for their own use, 
and tributes, rents, services, etc., were mainly paid 
in products; so long, then, as the production of 
commodities had not become the prevailing mode of 
production. It was possible for the money in circu- 
lation to be relatively scarce, notwithstanding the 
fact that every purchase or sale called for the dupli- 
cation of value, because a given quantity of the money 
commodity sufficed to effect the necessary exchanges 
of commodities of a much greater aggregate value 
than itself by passing successively and more or less 
rapidly from hand to hand. 

But when the commodity-producing society had 
graduated into its capitalistic form, the production of 
commodities became more and more the prevailing, 
and ultimately practically the universal, mode of 
production. Payment in money superseded gener- 
ally payment in products. Machine production on a 
large scale for the greatly increased populations far 
outran in value the scale of production of gold, 
which has its natural limitations. To all these 
developments was added the separation in time of 
purchase and payment, creating an additional 



52 Capital To-Day 

function of money as means of deferred payment, the 
subject of the next division of this chapter. This 
latter function includes the entire capitalist credit 
system in which the quantity of money needed at 
any particular time becomes utterly incalculable, 
but in its vastness is out of all proportion to the 
supply of gold. 

Fully developed capitalist society must have gold, 
or some other single commodity at least equally 
well adapted, as a universal equivalent. The legal 
coexistence of more than one commodity as general 
equivalent, as for instance of silver alongside of gold, 
would be possible only if the one were a by-product 
of the other in an unvarying proportion, and neither 
occurred independently in nature. On such a 
supposition the value changes of such different 
products would always run parallel, although the 
value of each differed from the other. But no such 
combination exists. As to the value relation of gold 
and silver, it remains stationary scarcely for two 
successive days, and all attempts in the past to fix it 
by law have proven futile. 

Without a socially recognized equivalent for every 
other commodity, the commodity-producing society 
cannot live a day. The selection of thousands of. 
years has fallen on gold as the standard commodity, 
and this form of society stands or falls on this foun- 
dation. It has required the maturing of capital 
within the last fifty years to reveal the inherent 
contradictions of money and the impossibility of 
permanent commodity production. The contra- 
dictions between the different functions to be per- 



Functions of Money 53 

formed by the identical money material, and nothing 
else as much as these contradictions, are the funda- 
mental and fatal defect of commodity production. 

So far these contradictions have been met by the 
device of various forms of imaginary money, dis- 
cussion of which is reserved for later chapters. We 
shall see that these forms of money cannot reconcile 
the contradictions, but can be helpful only in afford- 
ing a delay of the inevitable cataclysm, which must 
be the final outcome of these contradictions, mean- 
while enabling capitalism to progress further in its 
historic mission, the organization of the productive 
forces. 

c. Means of deferred payment. 

During the pre-capitalist period of commodity 
production the worker, himself the owner of the 
limited means of production required in his trade, 
produced his specialty for a local market which 
also afforded the means of satisfying his own wants 
by an exchange of equivalents through the medium 
of money. Every sale or purchase entailed an 
actual exchange of places between commodity and 
money, therefore the duplication of value. 

The condition of immediate exchange of values 
underwent a change in the course of the development 
of the capitalist system of large-scale production for 
a wider market, with the accumulation of profit 
as the object. This system called for continuity of 
the process of production so as to avoid the dis- 
integration of the labor force employed in a factory, 



54 Capital To-Day 

as well as the relatively high general expenses which 
result from interruptions of production. On the 
other hand the demand for many kinds of goods is 
seasonal. For these and other reasons, unnecessary 
to recount, the seller would appear on the market 
before the buyer was ready, and hence arose the 
necessity for the former to accept in realization of his 
commodities, not money, but a civil obligation, on 
the part of the buyer, of future money. Again, the 
necessity of selling for future money entails the 
necessity of procuring the present money needed 
for reproduction by borrowing. Discounting the 
buyer's promissory note or acceptance, or his bank- 
er's acceptance, amounts also to borrowing. The 
entire capitalist credit system, in all its ramifica- 
tions, is the outcome of selling commodities for 
future money. 

Credit can be traced back for thousands of years, 
but the capitalist credit system differs essentially 
from the ancient and pre-capitalist lending. It is 
inseparable from the capitalist mode of production 
in which money is borrowed for the purpose of mak- 
ing profit in industry, while in previous forms of 
society money was borrowed by kings and other 
spendthrifts or by the distressed poor. In the 
course of this subdivision we shall take occasion 
to tell of the load of interest, amounting annu- 
ally to a billion and a half of dollars, weighing 
on the miserably poor ryots of India, a country 
still mainly under ancient social forms. The differ- 
ence between credit as a form of exploitation and 
credit as an aid to industry accounts for the moral 



Functions of Money 55 

condemnation of former times of the taking of in- 
terest, while to-day it is considered most re- 
spectable. 

The separation in time of the entrance into circu- 
lation of the commodity and of the money of the 
buyer creates a new and distinctive function for 
money as a means of deferred payment. In the 
sale and purchase itself, money figures only in its 
function of measure of value, and then as ideal money 
or a promise of payment at a certain due date. 

In its concrete form of circulating medium money 
expresses a present relation of buyer and seller, its 
r61e in any exchange being momentary, although its 
mission is to remain permanently in circulation, un- 
like the commodity which drops out of circulation and 
goes into consumption. Money in this function is 
endowed with the legal guaranty of society that it 
is a universal equivalent, even, within certain limits 
to be discussed later, if the gold is represented by 
mere tokens. 

But money in its concrete form as means of 
deferred payment enters into circulation independ- 
ently, a reflection of a past relation, at a time when 
the commodity has dropped out of circulation and 
has perhaps been consumed. Instead of the social 
guaranty of money as medium of circulation, the 
seller has the merely juridical guaranty of a private 
person. As in circulation mere tokens are symbols 
of money and are made legal tender, so now the 
buyer himself becomes symbolic of money, and his 
obligation is made legally enforcible. The relation 
of seller and buyer has produced the new relation 



56 Capital To-Day 

of creditor and debtor. If the latter fails to pay 
at maturity, the state authorizes the forced sale of 
his belongings. When money functions as means 
of circulation, value is covered by value in the act 
of purchase and sale. With the sale of commodi- 
ties for money in its function of means of deferred 
payment, the existence of the equivalent of the 
commodities sold, either in money or in other com- 
modities, is unknown. In practice this fact has 
grown in economic importance since the actual pay- 
ment of the concrete money at maturity has given way 
to the mutual balancing of all obligations by special in- 
stitutions established for this purpose, leaving merely 
a small proportion of all obligations to be paid in gold. 
Thus the irresistible tendency of capitalist society 
to expansion has been freed from the fetters imposed 
on it by the existing stock of money. It is a highly 
important phase of that evolution which is to end 
with the demonstration of the impossibility of the 
permanent rule of money. 

Just as the functions of money as measure of 
value and as means of circulation must be united in 
the same money material, in spite of the contradic- 
tions between these two functions, so must that same 
material also perform the function of means of< 
deferred payment, in spite of the further contra- 
dictions involved. These further contradictions 
manifest themselves in the financial crisis. 

An interruption of the regular course of production 
from such a cause did not and could not exist during 
the prevalence of simple production of commodities, 
only outside events, as war, crop failure, or pestilence. 



Functions of Money 57 

interfered in those days with production and caused 
occasional want. 

In contrast with that period, the crisis — industrial 
as well as financial — is an inherent and unavoidable 
accompaniment of the capitalist competitive system 
of production. 

During the period of small-scale production the 
scarcity of commodity money occasioned no serious 
problem. But with the development of capitalist 
production, especially since its great expansion 
which began about the middle of the last century, the 
necessity of substituting imaginary money, such as 
paper tokens and bank checks, for the deficient gold, 
made itself felt more and more and has created a very 
serious problem. So far this development has pro- 
duced nothing worse than financial crises with partial 
liquidation through bankruptcy. But the defect, as 
already explained, is a fundamental one, and tends 
irresistibly, as our diagnosis in other chapters will 
show, to a cataclysm which will prove the impossibil- 
ity of competitive capitalism. Nothing can stay this 
outcome, except the previous transition of capitalist 
society from competitive anarchy into the perfect 
monopoly of an oligarchy, which can dispense with 
money. The latter eventuality, however, presents 
little likelihood, inasmuch as the process of mon- 
opolization is slower than the development of 
money. Every day brings the latter nearer to 
the critical point. Meanwhile the financial mech- 
anism remains in a precarious situation ; it rests on 
the faith in the general solvency and the faith that 
imaginary money is real money, — a faith which will 



58 Capital To-Day 

be rudely shaken by financial panics of increasing 
severity. 

The contradiction between money as a means of 
circulation and money as means of deferred payment 
complicates, as already stated, the question as to the 
sum needed in a country at a given time. It is 
evidently impossible for financial experts to esti- 
mate even approximately the sum of obligations 
maturing at any time, inasmuch as to-day an obli- 
gation may be entered into, maturing four months 
hence, and next month another maturing in three 
months, so that the coincident maturity of many 
obligations which originated in the deliveries of 
commodities at very different dates must be assumed. 
Society relies on the individual capitalist concern 
to make its calculations for meeting its own obli- 
gations. But the individual capitalist concern A 
is depending on prompt payment by B, and what if 
through any disturbance the chain of credit breaks? 
One bankruptcy brings on another, confidence is 
shaken, and creditors who have been selling for ideal 
money now storm the debtors for real money. The 
crisis is on. In it the visionary and nebulous shape 
of money, which in the sale had served only in its 
function of measure of value, suddenly assumes the 
definite shape of means of payment, or its cash 
reality. 

On the other hand, the more specific industrial 
crisis, of which the various causes may be summed up 
in the two words, ''planless production," tends to 
disappear more and more with increasing concen- 
tration. These causes, analyzed by Marx with 



Functions of Money 59 

arithmetical precision, are therefore losing economic 
importance in our time. 

The condition of disturbance or crisis would recur 
much more frequently than is actually the case, if 
there did not exist perennially a reserve fund which 
can be drawn upon in ordinary times to replace the 
broken links in the chain of credit. The existence 
of this reserve fund is not the result of the forethought 
and conservatism of the individual capitalists, the 
great majority of whom are only intent on doing 
all the business they can with the capital at their 
command. It is the capitalist system itself which 
compels the creation and constant renewal of a 
reserve fund of money. 

Let us observe a capitalist (or a combination of 
capitalists) starting an industrial enterprise. 

In the first place before he can realize a revenue 
from surplus product he must be in possession of 
an additional sum of money above his investment to 
enable him to live for a considerable time in his 
established style. This money remains idle to a 
diminishing degree until used up. 

Suppose next that his investment is $15,000, the 
weekly requirement for material and wages $1000, 
the period of production ten weeks and of circulation 
five weeks. At the end of the fifteenth week the 
capital is spent, but at the same time part of the 
money returns. Now, if the manufactured article 
is sold in arbitrary quantities and each unit requires 
ten weeks for its production, all the capitalist will 
collect at the end of the fifteenth week is the value of 
the first week's product or $1000, just sufficient for 



6o Capital To-Day 

the continuity of the process of production. If, 
on the other hand, the product is an indivisible entity 
and has required ten weeks for its completion, then 
the amount returning at the end of the fifteenth week 
will be $10,000, or $9000 more than required for 
reproduction for the time being. These $9000 are 
thrown out of function again and again. 

An extensive manufacturer of larger units of prod- 
ucts may say that he is not cognizant of any such 
ebb and flood tide in his concern. Nevertheless 
it exists mathematically, although concealed by ele- 
ments of taking and giving credit, prompt or slow 
collections, varying extent of stocks of material and 
products, fluctuations in prices, etc. 

Let us now assume that the capitalist, in addition 
to the $15,000 advanced for raw and accessory mate- 
rials and wages, has also invested for this business 
$10,000 in machinery and tools. Besides the neces- 
sary repairs which he will probably charge to expense 
account, there exists, in spite of the repairs, an 
element of physical depreciation, irremediable with 
age, and also of moral depreciation on account of 
the invention of improvements. This physical and 
moral depreciation enters pro rata into the value of 
each unit of the product and returns in money form 
to the capitalist. If the normal life of his machinery 
is put at ten years, there will have accumulated at 
the end of each year $1000, or at the end of the period 
the $10,000 necessary for replacement. During these 
years the machinery has continued to function, or at 
least in part, and its owner has held the depreciation 
reserve for amortization in the form of hoarded money. 



Functions of Money 6i 

With every turn-over there remains in the hands of 
the industriaHst a deposit of profit which cannot be 
immediately employed as additional capital, because 
the technical composition of modern industry re- 
quires a certain minimum outlay for machinery, 
as well as corresponding material and wages. Until 
the accumulation has reached the necessary mini- 
mum for an enlarged scale of production, this money 
does not function as industrial capital, but remains 
a hoard in the hands of the industrial capitalist. 
Even the large corporation, identified with and sup- 
ported by the great banking capital and therefore 
independent of such accumulation for its expansion, 
creates a surplus which, aside from its regular pur- 
poses, enables the corporation to pursue an estab- 
Hshed dividend policy, if thought desirable by those 
in control. 

Many capitalists collect continually smaller sums 
from many quarters which they are obliged to arrest 
in their circulation and retain as a hoard in order 
to be certain of being able to meet a larger obligation 
maturing at a future date; or they may accumulate 
such funds with a view to using them for purchases 
in more favorable market conditions, or for other 
purposes. 

The expression "hoard" in these pages, then, 
signifies money which is temporarily arrested in its 
circulation and out of function as capital, in conse- 
quence of laws inherent in the capitalist system and 
operating permanently. In the sense used here 
the term has no relation to the action of people in 
times of panic when they hide all the money they can 



62 Capital To-Day 

as the only thing in which rests safety or profitable 
possibihties ; nor to the old stocking of our progenitors 
which has a more pathetic counterpart in the back- 
ward land of India. It will be helpful to the under- 
standing of other passages in this book to refer more 
than cursorily to the hoarding of money in the old 
sense of the term in that important country. 

Much of the silver painfully dug out of the earth 
by poor humanity in Mexico and Peru in the seven- 
teenth and eighteenth centuries was as assiduously 
buried again by poor humanity in India who received 
it from Europe. The import of silver into India 
(from England and China) was about £12,000,000 
yearly in the middle of last century. This has been 
going on ever since, even on somewhat increasing 
scale (the amount of precious metal imported 
directly from England having been £14,000,000 
in 1905-6), yet the known circulation of money in 
India, according to the report of the U. S. Director 
of the Mint,^ was only $.78 per capita, compared 
with $52.81 per capita in Australia. 

This individual hoarding expresses the fear of the 
vicissitudes to which the workers are exposed in an 
almost purely agricultural and fertile country, but in 
which the primitive conditions have become dis- 
located by the forcible introduction of capitalistic 
changes. Thus it is that famines occur, that the 
worker consumes his seed corn and beasts and then in 
the last extremity, when the choice has narrowed 
down to death or practical slavery for himself and 
progeny, the distressed man turns to the money- 

^ Report 1912, p. 67. 



Functions of Money 63 

lender to enable him to buy his means of production 
and to tide him over until the next crop. 

Sir Andrew Fraser, in Among the Indian Rajahs 
and Ryots (published 191 1), informs us that the rate 
of interest in country districts used to be fixed by 
custom at 25% for six months. An anti-usury law 
had the opposite from the intended effect, because 
then the lender deducted the 25% beforehand, which 
raised the real rate to 33^4% for six months. Upon 
the abrogation of the law many lenders continued the 
practice of deducting the interest from the principal 
in advance, so that the prevailing rate of interest is 
to-day 50 to 66%% on an indebtedness of the agri- 
cultural community of £500,000,000. The parasite 
takes the entire product, except what is absolutely 
necessary to the existence of the worker, therefore it 
is easy to understand that the debts never decrease, 
but always increase, in spite of the "habits of pru- 
dence and thrift characteristic of the people gener- 
ally" to which Fraser testifies.^ 

As capitalist society develops in a country the 
individual hoards, produced automatically as de- 
scribed, take more and more the form of social capital. 
Collecting the individual hoards and placing them at 
the disposal of the money market is the function of 
the banks. ^ There are considerations of individual 
expediency regarding the extent to which capitalists 
will leave funds in banks of deposit subject to check 

^In addition to this load, India's excess of exports over imports 
is about £30,000,000 yearly, mostly in payment for "good govern- 
ment." This excess is all paid for in London. Besides India pays 
for the army to keep her in order, etc. 



64 Capital To-Day 

at no interest or on time at low rates of interest. 
For it is not the purpose of capitalists to accommo- 
date society at large, but to make profit — in fact as 
much profit as possible. The credit relations thus 
organized or extended by the banks have further 
resulted in public ''security" markets or stock 
exchanges where the hoards of the industrial capital- 
ists can be invested for shorter or longer periods in 
bonds and stocks yielding the current rate of interest. 

Hoarding on a social scale, finally, is imposed on 
the banks themselves for seasonal demands of money, 
as for instance for moving the crops, or quite tempo- 
rarily in preparation for dividend days, when call 
rates of interest are apt to advance considerably. 

Thus has the individual hoarding of old become an 
element of social cooperation, though still conducted 
for private profit. 



CHAPTER IV 

THE HANDICAPS OF THE MONEY SYSTEM 

a. Wastefulness of the gold basis. 

The total amount of metallic money in this coun- 
try in 1904 was 1994 million dollars. ^ The quantity 
of human labor expended in the production of this 
money, not for any use, but merely that we may be 
able to distribute our products among ourselves, 
would have duplicated three fourths of all the manu- 
facturing buildings which existed in this country at 
the same time, valued at 2610 millions (see p. 175). 

What is the reason why capitalist society must 
sustain such a dead- weight or item of faux frais, as 
the French call it ? The answer is founded deep on 
a general biological truth. 

Human society is an organism in course of evolu- 
tion along lines analogous to those of individual 
organisms in the organic world. This evolution may 
be considered as the gradual advance from physio- 
logical independence and social unconsciousness of 
the units of the organism to their physiological 
interdependence and social consciousness. 

Animal Hfe, beginning with the free single cell, 

* Statistical Abstract oj the United States (35th), Table 314. 
S 65 



66 Capital To-Day 

evolves a higher order in the cohesion of a number 
of cells, all capable of the identical functions. This 
stage is followed by a degree of specialization and 
interdependence of the cells. The final develop- 
ment is that of complex organisms whose parts are 
increasingly interdependent on each other, until 
absolute solidarity and social consciousness of the 
parts of the whole organism are attained. 

If human society had achieved the stage of social 
consciousness, then the production and circulation of 
the means of sustaining life would have become the 
function of certain organs created by society for the 
purpose of predetermining by experience and statis- 
tics the quantities and varieties of products required 
and subordinating the means of production to the 
desired end. Production and distribution would 
then be a directly social relation. 

Under the capitalist system production is con- 
ducted seemingly as the private business of independ- 
ent persons, but is nevertheless indirectly social, 
inasmuch as the social division of labor compels 
these private owners of the products to enter into 
social relations with each other the world over by the 
general exchange of their products. 

The process of exchange is the only one in it^ 
economy of which society is conscious, and as this 
process is subsequent to that of production, taking 
place at a time when it is too late to remedy mis- 
takes or technical shortcomings in production, society 
can only attest to the social value of the work done 
by individuals by giving for it something of equal 
solid value and as such socially recognized — namely 



Handicaps of the Money System 67 

money. Its necessity is a corollary of an imperfect 
and anarchical system of society. 
h. Inadequacy of gold basis. 

At first sight it would seem contradictory to speak 
at the same time of the great wastefulness of money 
by reason of the great amount of labor expended 
on its production for no rational purpose, and of its 
insufficienc}^ for the function it has to perform. But 
the seeming contradiction is only a reflection of the 
enormous contrast between on the one hand the small 
value of the more permanent wealth existing at any 
one time, and on the other hand, the immense con- 
sumption continuously going on, to which must be 
added the immense sum of fictitious capital and the 
price of land, all of which subjects will be more fully 
dealt with in subsequent chapters. 

For the circulation of their products earlier forms 
of the commodity-producing society required a sum 
of money equal to the total price of all commodities 
circulating alongside of each other within a certain 
space of time and at a given speed of circulation. 

The development of the new function of money, as 
means of deferred payment, has modified and further 
complicated the question as to the mass of money 
required at any particular time. Theoretically this 
mass is to be computed as follows : 

total price of all commodities circulating within a certain 

space of time — 
divided by the number of turns in which each money 

unit functions during that time — 
plus the sum of maturing obligations — 
minus the sum of balanced obligations. 



68 Capital To-Day 

Such a formula, however, amounts only to a state- 
ment of the problems involved. Practical application 
of the elements of the computation is impossible 
in a society which is not a conscious economic 
organism, but rather an agglomeration of semi- 
independent units. 

That the requirements for gold have not been 
lessened by the outgrowths of, and additions to, gold 
money in its capacity as a circulating medium, such 
as overvalued silver coins, irredeemable or uncovered 
paper currency, and bank checks, is plainly evident 
from the concern with which the financial world is 
continually estimating the prospect of the flow of gold 
from one country to another, and from the diligence 
with which the banks of the different countries 
apply themselves to forestall or further, according to 
the respective financial situations of their countries, 
the movement of relatively very moderate amounts 
of gold. 

While thus the outflow of even a few million dollars 
gold is at times viewed with an uncomfortable feeling 
in any country, much satisfaction is derived from the 
good showing made by those factors which militate 
in opposition to gold exports. 

The more permanent of those factors are the 
"favorable" trade balance and income from foreign 
investments. 

What is called a favorable trade balance is the 
excess of exports of commodities over imports result- 
ing from a home production in certain spheres of 
industry above the buying power of the home con- 
sumers, although many of these had need of more of 



Handicaps of the Money System 69 

these products, as for instance of foodstuffs in the 
United States,^ which are largely exported. How- 
ever, the return of the money advanced for the pro- 
duction of commodities, including the realization of 
the profit, is the final and all-important phase of the 
capitalist system and therefore, as already said, 
a matter of eminent satisfaction regardless of the 
detail whether this is accomplished at home or 
abroad. 

England and France import more than they 
export. Nevertheless the balance of account with 
foreign countries is in their favor as a result of their 
income from foreign investments. This state of 
affairs is likewise quite satisfactory, according to 
the French author of the report on the Bank of 
France to the United States National Monetary 
Commission, where the doctrine is expressed that **it 
is more advantageous for a nation to cause other 
nations to work and to draw from them 2,000,000,000 
francs yearly than to procure similar results by work 
at home. "^ What he has reference to is the income 
from French investments abroad, which invest- 
ments amount to about thirty billion francs. ^ As 
the working class is part of the nation, the advantage 
accruing to this class from the investments in foreign 

* An article in the New York Times Annalist of Feb. 9, 1914, says 
of the period since 1908: "... and (so far as we can get the figures, 
which is to the end of 191 1) the consumption of food per capita have 
all been decidedly lower. ' ' 

* National Monetary Commission, The Bank of France in its 
Relation to National and International Credit, by Maurice Patron, 
p. 14, Senate Doc. No. 494, 6ist Congress, 26. Session, 1910. 

3 Ibidem, P- I3. 



70 Capital To-Day 

countries is apparently a corresponding dispensation 
from work, but it is not stated that this dispensation 
is accompanied by a share in the income from the 
investments. 

We have now discussed the leading outside factors 
which influence the international movements of gold. 
But what about this material itself? What is there 
in its own relation to the financial system that rivets 
the attention, and frequently, now in one country 
and then in another, works on the nerves of the 
financiers ? 

In the first place let us look into the world's 
production of gold. According to estimates by the 
Director of the Mint, or figures adopted by him,^ 
this amounted 

Million dollars 
From the discovery 

of America 1492 to 1899 to 9,81 1 

1900 to 1912 to 4,964 



Total 14,775 

On the other hand for many years past the con- 
sumption in the arts has absorbed fully one third of 
the annual production, in 1912 174 millions out 
of 466 millions.'' In addition to this consumption 
''the movement of gold to India continues to be a 
matter of world-wide importance. ... It ap- 
pears that India has taken during the last two years 

^ Annual Report of the Director of the Mint, 19 13, p. 315. As 
everywhere in this book, we omit fractions of millions. 
^Ibidem, p. 259. 



Handicaps of the Money System 71 

about 28 per cent, of the world's production of 
gold."' The exports of gold to India are almost 
as definite a deduction from the world's supply 
of money as is the consumption in the arts, for 
the reason that none of this gold ever returns. 
The bulk of it is either hoarded or made into per- 
sonal ornaments, the latter being the only form 
in which the Hindu inheritance laws permit 
property to descend to the female members of a 
family. 

In the face of these figures it is no wonder that the 
world's whole stock of gold on Dec. 31, I9i2,was 
estimated (with unimportant omissions) at not more 
than the following^: 

Million dollars 

United States 1,880 

British Empire 1,482 

France i ,200 

Russia 1,000 

Germany 863 

South America 455 

Austria 294 

Italy 248 

Others i ,059 

Total 8,481 

Now just what is the significance of say nine billion 
dollars gold in the world's economy? 

There is here only to be considered the relation of 
this sum of gold to the credit system in which, in all 

^Annual Report of the Director of the Mint, 1913, p. 66. 
a Ibidem, p. 64. 



72 Capital To-Day 

its vastness, money is the stated object and consider- 
ation. The credit system includes all purely fictitious 
capital, like national debts, shares of corporations 
capitalized on the proportion of their earning power 
to ordinary interest, mortgages on land which has 
no value at all but only a monopoly price, credit 
money arising from deferred payments for commodi- 
ties, such as acceptances and promissory notes. The 
amounts involved are out of all proportion to the 
value of existing permanent capital and even of 
all wealth. The kingdom of credit is imposing by a 
mere recital of its subdivisions. To quote again 
from the enthusiastic author of the already-mentioned 
Senate Document (page 8) : 

Let us for a moment consider these instruments of 
credit which justly do honor to our modern civilization; 
their number increases constantly; in addition to bank 
notes, checks, transfer orders, certificates of deposit, 
bills of exchange, bills payable to order, drafts, storage 
certificates, we have stock market securities, treasury 
bonds, mortgages, warehouse receipts, coupons. 

In this enumeration we miss promissory notes, 
which in the United States are of such importance 
that their discounting is the main operation con- 
templated by the new banking system established by 
the so-called Glass-Owen law enacted by the United 
States Congress in 1913, and discussed in detail in 
Chapter VII., section b. 

And yet only the visible, negotiable, and transfer- 
able instruments or evidences of credit have been 



Handicaps of the Money System 73 

touched on, not all credits. Think of all the open 
accounts on the books of all business concerns in the 
United States and in the whole world! They all 
originated in a value relation to gold and are payable 
in gold or in money symbolizing gold. 

If it were possible to translate all credits into the 
total sum of money by which they are supposed 
to be redeemable, that sum, like the figures in 
astronomy, would transcend human appreciation 
and a comparison with the nine billions gold, the 
only absolute value basis, would cause one to marvel 
how such a highly artificial system can exist for a 
day. 

It would be interesting to catch a glimpse, even if 
only a passing and imperfect one, at the figures 
concerned. 

Out of the kingdom of credits, genus stock ex- 
change securities, family bonds, we pick the species 
government bonds. The national debts of the world 
(not including state, provincial, and municipal) 
amount to about forty-four billion dollars. ^ 

The value of the annual imports and exports of 
the same countries was almost as large, exceeding 
forty billion dollars.^ This international commerce 
calls into existence a portion of that variety of 
instruments of credit called bills of exchange. 

In this international commerce the United States 
participates to the extent of one tenth. Here, as 
everywhere, the foreign commerce cuts a small fig- 

^ Statistical Abstract of the United States, 19 14, p. 693. This was 
the amount before the outbreak of the war in 1914. 
^ Ibidem, p. 685. 



74 Capital To-Day 

ure compared with the domestic. In a compilation 
of the "national" wealth essayed by the Census for 
1904 the value of the stock of products totaled fif- 
teen to twenty billion dollars.^ The annual turn- 
over of products varies of course greatly, according 
to the nature of each product, but the total stock 
existing at any one moment must on the average 
be consumed and replaced a number of times 
during a year. Therefore the sum-total of the 
domestic commerce which took place in 1904 must 
have been enormous, compared with our exports 
during that year of 1460 millions.^ Other coun- 
tries, we may be sure, show a similar contrast be- 
tween the volume of their domestic and their foreign 
trade. 

So far as this country is concerned, an approxi- 
mate idea may be gained from the existing records 
of bank clearings. They include, of course, the 
foreign trade and the immense stock-exchange trans- 
actions, for which however the money turn-over is 
greatly reduced by the stock-exchange clearing- 
house. They also include payments for land which 
are an unknown quantity. It is, however, easily 
realized that the great bulk of the bank clearings 
represents the sale of commodities. 

Now, in the census year 1904 and in 191 3, the 
clearings and their proportion to the stock of gold 
in the United States, including the government stock, 
were: 



* Statistical Abstract of the United States (35th), Table 335. 
'Ibid., Table 242. 



Handicaps of the Money System 75 

1904 Clearings 102,356 million dollars 

" Gold 1,328 



1913 Clearings I73.I93 

" Gold 1,905 






This shows that there existed in this country, for 
every $100 cleared, a sum of gold in 

1904 of $1.30 
1913 of 1. 10 

The progress of clearings during this period has 
been quite steady and normal for each year, except 
during the year of depression following the panic of 
1907. 

Incidentally there figures show further that (not- 
withstanding the great increase of gold production 
since the beginning of this century, equaling the 
production of the previous forty years) the stock 
of gold has not only gained no headway, relatively 
to the total money turn-over, but has actually 
shrunk. And this in the United States, the most 
favored country! 

No such accurate records exist in the United 
Kingdom, but we shall presently see that its stock 
of gold is known to be so nominal as to make the 
country more dependent on the continuance of fair 
weather than the United States. 

The check turn-over of the kingdom was esti- 
mated to have been over 25,000 million pounds in 
1906. The banks are supposed to carry adequate 
reserves, but in reality they deposit their entire 



76 Capital To-Day 

reserves in the Banking Department of the Bank of 
England. The latter invests these deposits in 
securities and loans, keeping only about a third as 
reserves. This is surely close financiering, but the 
situation is aggravated by other factors. The 
bankers of London constitute the world's clearing 
house, and this function subjects the London market 
to unusual perturbations. On this account the gold 
reserves of the Bank of England, which means the 
gold and notes of the Issue Department held by the 
Banking Department, fluctuate greatly. The rela- 
tions of the two departments will be explained 
presently. In round million pounds these reserves 
were: 15 in 1885, 13 in 1888, 30 in 1895, 35 in 1896, 
21 in 1899, and 32 in January, 19 14. With these 
fluctuations correspond the frequent changes in 
the Bank's rate of discount, of which there were 
273 between 1870 and 1907 as against only 41 of the 
Bank of France during the same period. 

Furthermore England's imports exceed the exports 
(in 1906 by 147 million pounds). This creates a 
natural tendency toward an outflow of gold, held in 
check by the income from foreign investments (which 
are estimated at 4000 million pounds), income from 
maritime carrying trade, and India's tribute. 

In order to prevent over-issues of bank notes 
which had so often caused panics in England, the 
Peel Act of 1844 separated the note issue department 
of the Bank from its banking business. The Issue 
Department was only to issue notes to persons 
depositing an equal amount of gold with it. Aside 
from such covered notes, the Issue Department could 



Handicaps of the Money System 77 

only issue notes for the amount of the debt which 
the government owed to the Bank and for some 
minor items, in all at present £18,450,000. It is 
plain that the gold in the Issue Department is a 
fiduciary fund, belonging to the holders of notes and 
held subject to any call for their redemption, just as 
our Treasury has the exact amount of gold against 
our circulation of gold certificates. 

It is necessary to understand that the relations of 
the Banking Department to the Issue Department 
are essentially the same as those of any other bank 
or person. Nevertheless the Peel Act has been 
suspended four times during panics, giving the Bank- 
ing Department access to the treasure held by the 
Issue Department in trust for others; otherwise the 
Bank of England would have failed. 

There are some students of finance who realize the 
precariousness of the proportion of the gold reserve to 
credits in England. In proof of this it is necessary 
to quote from the aforementioned report on the 
Bank of France, p. no, inasmuch as Senate Docu- 
ment 591, dealing with the Bank of England, is 
strangely silent on this topic : 



At a meeting of the Bankers' Institute, which was held 
in London in November, 1906, the insufficiency of the 
reserve was discussed. It was recognized that, in general, 
the banks do not appear to realize the necessity of having 
sufficient reserves to maintain the immense credit struc- 
ture they must support. . . . The last crisis has especi- 
ally drawn attention to the general scarcity, and every 
country has perceived that it lacked gold [p. 1 11]. 



78 Capital To-Day 

The New York Times of Jan. 24, 19 14, contained 
a one-column telegram from London, beginning : 

Sir Edward Holden, Chairman of the London City and 
Midland Bank, has raised an alarm as to the inadequacy 
of the British gold reserves, which is attracting serious 
attention. For a long time past he has advocated 
publication by the joint stock banks of their gold reserves, 
arguing that the present system, whereby only the Bank 
of England is bound to make such an exposition . . . 
constituted a national danger. 

What Holden is after, is to make the joint stock 
banks turn their pockets inside out so that it may be 
publicly realized to what extent the gold reserves, 
supposed to exist there, are an actuality or only a 
myth, having been already accounted for in the 
Bank of England reserve, where they are deposited 
by the joint stock banks. 

In the further course of his statement Holden 
refers to the foreign and colonial banks in London, 
regarding the magnitude of whose operations we 
are left in the dark, saying : 

We have at the present time carrying on banking 
operations and creating credit in London no fewer than 
120 foreign and colonial banks. The credit created here 
by the operations of these banks really is based on the 
small gold reserve in the Bank of England, which works 
between a minimum of £24,000,000 and a maximum of 
£40,000,000 sterling. The gold in the Issue Department 
is largely contributed through a portion of the reserve 



Handicaps of the Money System 79 

of the joint stock banks being held in the Bank of England 
and also through notes which are held by bankers and 
by the public. The total liabilities on current and 
deposit accounts of the joint stock banks of this country, 
including the banks of Scotland and Ireland, amount 
approximately to £860,000,000 sterling, while the total 
amount due to depositors in the Post Office and Trustee 
Savings Banks is about £250,000,000 sterling. 

What troubles Holden is the thought of what 
would happen to the ''credit created here by the 
operations of these [foreign and colonial] banks'* 
and which was "based on the small gold reserve in 
the Bank of England, " if the joint stock banks were 
to need that portion of their reserve which, by way 
of the Banking Department, contributed largely to 
the gold in the Issue Department and if at the same 
time the "notes [Bank of England notes] which are 
held by bankers and by the public" were presented 
for redemption in order to export the gold on account 
of the state of exchange. 

In Germany the discount rate is generally higher 
than in England and France, but as it is not always 
feasible to protect the gold by raising the rate high 
enough, other means are applied to this purpose. 
A demand for gold may be met by a bureaucratic 
frown from the director of the Reichsbank and a 
hint that insistence on gold might be injurious 
to the business of the applicant, who readily inter- 
prets this as meaning a rejection of his discounts 
and possibly a closing of his account. 

The following is an indication of the close financier- 
ing of Germany : 



8o Capital To-Day 

In order to reduce the demands for gold, which became 
alarming, a circular was sent at the end of December, 
1907, to all public officials, recalling another circular, 
quite recent but already forgotten, which advised officials 
to take their salary in bank notes and not to insist upon 
gold.^ 

In 1898 the note circulation of the Bank of France 
was covered to the extent of more than 100% by 
metallic reserves, ^ which dwindled down to 68% of 
the note circulation in the first week of February, 
1914.3 

This institution resorts occasionally to the expedi- 
ent of dodging gold payments by tendering silver 
(which is legal tender) or charging a discouraging 
premium on gold. 

Having reviewed the status of the gold supply 
in the principal countries, the question is now in 
order as to the meaning of their great solicitude 
for their little piles of the yellow metal. It is as if 
its guardians were addressing the capitalists in this 
wise : 

We know that the balance of account with foreign 
countries has to be settled in gold or in something else 
acceptable to them; we know that, as our raising the 
discount rate tightens money all around, the need of 
money induces forced sales of commodities and stock 

* Sen. Doc. No. 494, 6ist Cong., 2d Sess., 1910, p. in. 

" Ibidem, p. 16. 

3 New York Times Annalist, Feb. 9, 1914, p. 176: Note circulation 
6029 million francs; gold on hand 3459 million francs, silver 650 
millions. 



Handicaps of the Money System 8i 

exchange securities, and that the account due to the 
creditor country must be settled with commodities or 
securities at the decimated prices resulting from this 
process. The losses to you from the low prices will be 
exceedingly severe, but they will be the lesser evil by far 
compared to a suspension of specie payments with its 
disastrous consequences — a depreciating currency and 
the unsettlement of all values. 

Such were the conditions presented by the Baring 
panic in 1890 when England was obliged to return 
American investments to the United States. The 
latter country, during its own panic of 1893, exported 
securities estimated at 237 million dollars at "bargain 
prices." 

In the Baring panic the Bank of England would 
have been obliged to suspend, if it had not been for 
the assistance lent to it by the Bank of France. Had 
the suspension not been prevented by the French 
bank the whole world would have been disastrously 
affected. 

The modern credit system is a complex and highly 
developed social organism. While each nation 
aims naturally to protect itself in the first place, yet 
an injury to one capitalist nation communicates 
itself promptly to all the others. This has been a 
regularly observed phenomenon. Even the New 
Zealand crisis had a world-wide effect. The vast 
credit system, social in its nature, rests on the very 
narrow basis of the existing stock of money, and 
being an organism of a very high order is correspond- 
ingly sensitive, especially in relation to its basis of 
existence — gold. It is a fact in nature that the 

6 



82 Capital To-Day 

higher the organism and the more complete its 
integration, the more sensitive it becomes. Certain 
worms may be cut into several pieces and each piece 
will reconstitute the complete animal; the starfish 
can reproduce its arms ; the sea-slug its stomach ; the 
lobster its claws ; the spider its legs ; the fish its fins ; 
the lizard its tail; but in the higher organisms an 
injury to a part is beyond repair and may be fatal to 
the whole. 

Of the world's annual production of gold more 
than half is derived from two countries — South Africa 
and Australia. In the first-named country there 
exists a state of class antagonism which in 191 3 
broke out into a condition closely resembling a state 
of civil war, with the whole army on a war footing, a 
proclamation of state of siege, suspension of law/ 
and prohibition of code words in foreign cable dis- 
patches. The workers were beaten into submission. 
In Australia, where the workers have the vote, there 
exists a labor party at present about equal to the 
combined strength of the other parties. 

It has been said that the coal miners and trans- 
portation workers occupy strategical positions in 
coming class contests. If this anticipation has any 
value, may it not be that the gold diggers in those 
outlying regions, the Transvaal and Australia, hold 
the lever at an equally dangerous point in our social 
system, the gold supply? 

The London Times, as reported by the Annalist 
of Feb. 9, 1914, in referring to the Union Govern- 

^ The deportation of English subjects has since been somewhat 
atoned for by the resignation of the Governor General. 



Handicaps of the Money System 83 

ment Economic Commission, appointed to survey 
conditions in the South African mining fields, says 
"that the proceedings of the commission have been 
in camera, or private, because of the acute labor 
troubles. ... As the production of gold elsewhere 
in the world had become a stationary, if not a shrink- 
ing industry, while at the same time the demand 
for gold was steadily increasing, the economic effect 
of a decline in the Rand's production, owing to labor 
troubles alone, was a matter requiring serious 
thought."' 

^ The Annalist comments: "If the world's production of gold is 
going to decline, actually or relatively, it will be necessary to 
increase the ratio of instrumentalities of credit to a certain gold 
base," So the remedy for the present deficiency of the gold sup- 
ply relative to the volume of credit is more credit! 



CHAPTER V 

MONEY TOKENS 

a. General theory. 

The analysis of value by Marx has shown that 
money originated in a commodity whose value be- 
came by social consent the standard of value of all 
other commodities. As such a commodity gold 
continues to function in international finance, in 
which sphere it moves in bulk and by weight. 
Within the boundaries and by authority of states 
certain arbitrary quantities are coined into units of 
money which are the legal tender to which all money 
obligations have reference. 

Gold, then, as the standard of value, may be called 
the Standard Money, if we wish to differentiate it 
from those substitutes in use whose material is of a 
value inferior to that at which they are rated or of 
no value whatever. Such substitutes are desig- 
nated as tokens, and the principal materials used 
are silver and paper. They are issued under 
the same authority as the gold coins, i. e., by the 
state, but their legal tender quality differs in the 
various countries. In some of these certain tokens 

may be legal tender, while in others, as in the United 

84 



Money Tokens 85 

States, they are not absolute tenders for all purposes 
or at least may be excluded by private contract. 

How is it possible for a state to endow an intrinsi- 
cally worthless thing like a slip of paper with the 
power of functioning as money within its borders ? 

Be it noted first, in answering this question, that 
tokens cannot perform all the functions of money. 
Not being value themselves,' they cannot serve 
as measures of value any more than anything impon- 
derable can serve as a measure of weight. Further- 
more, they cannot serve as means of deferred 
payment, because that function likewise requires a 
money material of standard value in order that the 
value payable and receivable at maturity may be 
fixed with exactness, whereas tokens are subject both 
to overvaluation and to depreciation. The only 
function of which tokens are capable, and that only 
within limitations presently to be discussed, is that 
of medium of circulation. 

It is a common observation in countries where gold 
in active circulation is not such an unusual sight as 
with us, that coins considerably worn pass current 
at their face value. Similarly, subsidiary coins 
everywhere are issued much below their indicated 
metal values, our own being worth, as silver, when 
not worn, about thirty-seven cents on the dollar. 
Evidently such worn coins or debased subsidiary 
silver coins are merely symbols of their pretended 
value, continuing to circulate as if they were other 
than their own shadows. This points the way to the 

* To avoid repetitions references to silver and subsidiary coins 
are omitted. 



S6 Capital To-Day 

possibility of substituting for gold a paper currency, 
not in the sense of our gold certificates, which are 
representative of corresponding coins stored in the 
Treasury, but of an unsecured paper currency. It 
generally matters little whether the latter be nomi- 
nally redeemable in gold or frankly irredeemable. 
For if there is no provision, or only inadequate 
provision, for its redemption, and if obtaining the 
gold for this purpose is a moral, if not physical 
impossibility, then where is the important distinc- 
tion? The difference between debased or over- 
valued coin and intrinsically worthless paper 
money is only one of degree, not of principle, and 
whoever insists on money of full value will have 
the same argument in refusing a 40 per cent, silver 
dollar, 37 per cent, subsidiary coins, or o per cent, 
paper dollar. 

Let us now examine the economic ground on 
which rests the feasibility of a paper currency and 
the limitations of its use. 

For the alimentation of the social body the essential 
thing is the exchange of the privately produced use- 
values. This exchange must be mediated by money 
which, its function performed between two commod- 
ities here, hurries away to repeat its mediation else- 
where. This ephemeral r61e of money in the process 
of exchange, like the quasi-social character of money, 
is concealed by the fact that it is itself value, as is 
the commodity. Being thus devoid of any impor- 
tance in itself as regards the social alimentation, and 
being a quantitatively insufficient and clumsy tool, 
as well as causing unprofitable expense, its elimi- 



Money Tokens ^7 

nation by means of tokens and other contrivances has 
always been aimed at. The modern state has dis- 
covered that it may substitute largely, by its author- 
ity as the supreme organ of society, the directly social 
paper tokens issued by itself, for the indirectly social 
gold, originating in private production. But as 
society is not yet a conscious economic organism, 
the power of the state to issue tokens is limited 
in quantity by the economic laws which are at the 
base of the existing form of society. 

The state originates the paper token by printing 
and issuing it in payment of commodities. For 
value received it gives an acknowledgment of a 
non-interest bearing debt. To the recipients the 
acknowledgments serve as the money form of value 
of their commodities, after which the notes pass 
current as money from hand to hand. Theoretically 
they should finally be received by the governments 
in payment of taxes and imposts, products and 
services, but practically this is far from being the 
case. If so received by governments, these must 
be considered to have given value against the return 
of their acknowledgments of debt. Thus the cycle 
would be complete and the accounts balanced. 
What, under the theory, would have taken place 
is a simple exchange of commodities (products and 
labor power) owned respectively by individuals and 
by the state, the tokens having performed the fleet- 
ing function of money in the circulation process. 
In reality there exists nowhere the slightest in- 
tention of canceling the tokens upon their being 
received by the governments, as that would reduce 



88 Capital To-Day 

the sum of the circulating medium, whereas the 
requirements are constantly on the increase^ not 
only absolutely with the increase of population, 
but even, though to a much lesser degree, per capita. 
Nor would it be possible for them to replace the 
tokens in the circulation by redeeming them with 
standard money, gold, of which the enormous 
quantity needed for this purpose would be practi- 
cally unobtainable. 

In the latter respect there is a radical difference 
between the redemption of tokens and of government 
bonds. The United States has paid off a bonded 
indebtedness much larger than its token indebted- 
ness, although a redemption of the latter would have 
been out of the question. The process by which it 
was enabled to do this was the following : the customs 
duties, fixed not so much for revenue, as for protec- 
tion purposes, were made payable in gold, and as the 
receipts were in excess of the needs of the government, 
it used the surplus to call in bonds, whereupon the 
gold became again available for the payment of 
duties, and this cycle repeated itself over and over. 
This was possible, because the general circulation was 
attended to by tokens. Thus on account of the 
constant inflow of gold into the Treasury a relatively 
small amount of gold was adequate to effect the 
gradual extinction of the bonded debt. The move- 
ment of the gold was rotary, with the Treasury as 
a point of passage in each rotation, while redemption 
of the tokens by standard money would mean a 
movement of gold in a straight line — away from the 
Treasury into the general circulation, a stream that 



Money Tokens 89 

would continue until the whole face value of the 
tokens was replaced by gold. 

We have already found (Chapter IV.) that the total 
quantity of money needed in a country results from 
the addition of the sums required by money function- 
ing as a circulating medium and as a means of deferred 
payments minus the balanced payments. In this 
country the deferred payments are almost wholly 
effected by checks of which the clearance leaves only 
a balance of about 5% to be paid in actual money. 
The relative unimportance of these money payments 
of check balances is easily realized if calculated 
on the total clearings mentioned in the preceding 
chapter, when it will be found that a sum of thirty 
million dollars, set aside and daily turned over at the 
clearing houses, can do the entire work. This seems 
a small sum for the settlement of the checks, when 
compared with the 1800 millions of money in real 
circulation among the people (outside of assets of 
the Treasury and reserves of the banks). Further- 
more, any fluctuations in the volume of deferred 
payments, which after all form only a part of the 
clearances, are apt to follow the fluctuations in the 
volume and speed of the circulation. Why circu- 
lation alone is considered in the following pages the 
above digression explains. 

The fluctuations in the circulation are very con- 
siderable, but the latter can never fall below a certain 
minimum which is found by experience. If we con- 
sult the national clearings as the best indicator, we 
find that the figure of 1908, in the depression follow- 
ing the panic of 1907, fell 30% below that of 1906, 



90 Capital To-Day 

while the clearings of 1909 rose 33% above those of 
the preceding year. ^ 

Within this minimum circulation in years of de- 
pression and in such seasons of such years of depres- 
sion when there is no special demand for currency, 
as for instance for crop- moving purposes, lies the limit 
of the usefulness of tokens. The law of their use 
rests on their representative relation to gold, and 
Marx formulates the law to the effect that "the issue 
of paper money must not exceed in amount the gold 
which would actually circulate if not replaced by 
symbols."^ Of course Marx relates this law to a 
minimum circulation, but even at the extreme ebb 
tide a temporary depreciation of the tokens may be 
precipitated by the mere contingency rather than 
by the fact of the complete disappearance of gold. 
If the channels of circulation become so filled up with 
paper as to leave little or no room for gold, the very 
fear of a depreciation of the paper currency will bring 
it about. 

Imagine a country possessing a certain stock of 
gold, the major part of which is hoarded as reserves 
or stores of value in the treasury, central and other 
banks, and in special funds. The active circulation 
devolves on tokens to the amount of 500 millions at 
par with a margin of free gold of 100 millions. Now 
there occurs an additional issue of paper money, 
doubling the sum of tokens in circulation. All 
these tokens pretend to represent gold. This, how- 
ever, they are only capable of doing within the lim- 

' Statistical Abstract of the United States, 1914, p. 631. 
* Capital (American edition), vol. i., p. 143. 



Money Tokens 91 

itations of the economic law already referred to. 
Presently it is found that the tokens circulate at a 
discount compared with gold. ^ What has happened ? 
Being legal tenders the tokens are used preferably 
to pay debts with, and the gold, being apparently 
in excess of the needs of circulation, retires therefrom. 
The fact of the matter is that the price of the commod- 
ities to be purchased within a given limited time 
(making allowance for any irregularity caused by 
the function of money as means of deferred payment 
as between one period and another, which irregularity, 
however, is not influential in countries where such 
payments are made by checks) is only 700 millions. 
This total commodity value is confronted by 1000 
millions in tokens which are the measure of value. 
But they are no longer gold tokens; they are value 
tokens, a reflection of the value of the commodities. 
1000 units in tokens now equal 700 in gold. The 
latter has itself become a commodity which may be 
sold and the proceeds used to settle obligations. 
Gold as a commodity differs from other commodities 
in that it is the only one in which the depreciation of 
the tokens appears. Besides it continues as the 
world's money commodity, and it is for this reason 
that the depreciation of a country's currency always 

' In Faust, Second Part, Mephistopheles becomes the inventor 
of paper money. This spreads quickly, amidst general enthusiasm, 
but does not long remain at par: 

"Mit Blitzeswink zerstreute sich's im Lauf. 
Die Wechsler — Banke stehen sperrig auf, 
Man honorirt daselbst ein jedes Blatt 
Durch Gold und Silber, freilich mit RabatC* 



92 Capital To-Day 

reveals itself first by an adverse movement of foreign 
exchange rates. 

A firm, regularly importing a certain kind of pro- 
duct, and being expert in financial matters, will not 
sell at the market price, if it foresees that the cost 
of the next importation might be higher than the 
price realized in the sale, owing to a higher exchange 
rate. Therefore it will first cover exchange on future 
importations, which is the same as saying that it buys 
gold to be paid out in the country of exportation or in 
one of the foreign banking centres. Similar demand 
for exchange from a number of importers of com- 
modities (or at times of securities) causes an advance 
of the rate which may rise to a point where it is 
cheaper to procure and ship gold. The competition 
for gold then results in the payment of a premium, 
which is identical with a depreciation of the paper 
currency. The depreciation reacts immediately on 
the prices of exportable goods and ultimately on those 
of all other things. 

If the eventuality of even a moderate or possibly 
temporary depreciation is to be avoided, the maxi- 
mum paper issue must remain below the minimum 
circulation by such a margin as to compel the en- 
trance into circulation of some gold at all times. As 
long as gold fills up part of the needed circulation 
the paper will remain a symbol of gold whose value 
is reflected in it. 

What is said here of a paper currency in excess of 
the minimum requirements of money holds good for 
a circulation of silver or a combination of both, except 
that while paper issued to excess may become utterly 



Money Tokens 93 

worthless, silver coins, which are practically bills 
printed on metal, cannot depreciate below their melt- 
ing value. 

The historical instances of great depreciation, 
followed generally by repudiation of paper money, 
are not few in number. The large-scale experiment 
of the French Revolution with ' * assignats ' ' ended with 
repudiation. England, until the passage of the Peel 
act in 1844, was again and again shaken by panics 
and the bankruptcy of the paper issues which had 
caused them. The colonial governments of the 
North American colonies again and again repudiated 
their notes. What became of the Continental bills 
issued by the federal government during the War of 
Independence is remembered by the expression of 
utter disparagement of the worth of a thing: "not 
worth a Continental. " The Confederacy met rising 
prices by fresh issues of paper (which raised prices) 
until Richmond market prices in May, 1864, were: 
boots $200; coats $350; flour $275 per barrel; beans 
$120 per bushel; butter $15 per pound. ^ Even our 
greenbacks at one time were down to 35 cents gold. 

It is this quantitative aspect of money, put into 
relief by the history of depreciation and repudiation 
of paper money, that has led the political economists 
and similar ** authorities " even to this day to transfer 
the quantity idea indiscriminately to all money, 
hence also to gold. They cannot afford to notice, 
much less to acknowledge, the Marxian theory of 
value, on account of its far-reaching consequences 
(to which we will devote a later chapter) , and they 

' Enc. Brit., 9th ed., vol. 23, p. 776. 



94 Capital To-Day 

therefore look in any direction but the right one for 
an explanation of changes of money value. This 
quantity idea we shall treat more fully in the next 
division of this chapter. 

In spite of the teachings of history, there have 
arisen in our own generation and country three 
distinct political movements having as their object 
the arbitrary augmentation of the circulating medium 
by tokens. The earlier ones (the Greenback and 
People's parties) demanded a redundant paper cur- 
rency ' ' based on the credit of the nation. ' ' The more 
recent one was engineered by the Democratic party 
under the leadership of Bryan, and demanded the 
free and unlimited coinage of silver at the ratio of 
1 6 to I. All these movements were essentially of the 
debt-laden middle class against the capitalist class, 
incidentally menacing the interests of the wage- 
working class. Their defeat at the polls on the 
square issue does not disprove the possibility of a 
measure of success for similar, though perhaps less 
sweeping, demands by even an inconsiderable minor- 
ity, if it holds the balance of power or if its power is 
otherwise feared by the politicians, as illustrated by 
the silver purchase acts which we shall discuss farther 
on. 

The Greenbackers, Populists, and Democrats may 
not have cared about the ultimate consequences 
of debt-extinguishing inflation, and declamations 
against the ''gold bugs" and the "golden cross" ap- 
pealed to their debt-laden middle class adherents. To 
the working class, however, a correct understanding of 
the nature of money is of the greatest importance, 



Money Tokens 95 

in order to be safe against being led astray by 

financial will-o'-the-wisps. 

h. Proof of general theory by deviating hypotheses. 

The law governing the issue of paper currency has 
been stated in the preceding division of this chapter. 
Let us now proceed to an illustration of this law by 
the use of various deviating hypotheses. 

Suppose the total price of commodities in circu- 
lation at a given moment to be ten million dollars. 
Divide them into two groups of the aggregate price of 
five millions each. These two groups are to be ex- 
changed against each other. The gold needed to 
effect the exchange would be five million dollars, be- 
cause, whereas each commodity calls for the dupli- 
cation of its value in gold, in the act of exchange the 
money changes its place twice (or makes two turns), 
while each commodity (or group of commodities, as 
here assumed) changes its place only once. In other 
words, first the owners of one group of commodities 
sell the same for five million dollars, then, with 
the money received for the sold commodities, buy 
the other group of commodities, thus completing the 
exchange. 

Now imagine gold abolished in the country as 
money, and paper slips substituted, to continue the 
foregoing example, say, to the number of a mil- 
lion, each of the denomination of five dollars. The 
value of the commodities in each group swells to 
seven and a half million dollars, still confronted by the 
unchanged sum of the paper slips. But the two groups 



96 Capital To-Day 

of commodities must absolutely be exchanged with 
each other. They cannot be exchanged with each 
other directly, but only through the medium of 
socially recognized money. Therefore the sum of the 
paper slips comes to represent the increased value 
of the group of commodities which is to be turned over 
and each slip acquires a buying power of seven and a 
half dollars, although its denomination is five dollars. 
Inversely, if the total value of the commodities in 
circulation be reduced to half, or five million dollars, 
the single slip will represent two and a half dollars, 
regardless of what is printed on it. 

It is thus seen that the currency value of a fixed 
volume of paper money is determined by, and 
fluctuates with, the total price of the commodities in 
circulation at a given moment. The original issue 
of this paper money, which purported to serve as a 
substitute for the previous gold, has been found to be 
subject both to overvaluation and depreciation. 

The hypothesis of an exclusive paper currency 
leads to the conclusion that such a currency affords 
no standard of value by which can be determined 
money obligations to be fulfilled in the future. It 
is true that the paper currency continues after a 
fashion to be the measure of value inasmuch as the 
prices of commodities are expressed in this currency, 
but this expression of prices is subsequent to the 
revelation of the value of the currency by the volume 
of commodities which are to be turned over and which 
are themselves a variable value. 

It may be objected that gold also is subject to 
variations of value. These, however, are not nearly 



Money Tokens 97 

as frequent or abrupt as the changes in the require- 
ment of means of circulation caused by the cycles of 
industrial expansion and contraction. And if history 
has made a mistake in selecting gold as the world's 
money, by what other single product of labor could 
capitalist society advantageously replace it ? 

So far the supposition has been that the paper 
currency is a fixed quantity. But once the principle 
of money of value has been abandoned, what guar- 
anty is there against undue augmentation of the 
paper? Whatever may have been the theories or 
forces which brought about additional issues of 
paper, once they are issued they will thereafter be 
required in the circulation, because of the adjust- 
ment of commodity prices to the increased circula- 
tion. Any subsequent reduction of its mass could 
only be effected either by gradual cancellation of the 
government's excess of revenue in paper currency 
over its expenditure or by the return of the paper to 
the government by the capitalists to whom it had 
been issued as loans. As regards the first mode, 
the concern of most governments is not so much to 
dispose of any surplus, as to discover new sources of 
taxation and of borrowing to meet the constantly 
increasing expenditures. The latter mode is the one 
alleged for the Glass-Owen law. 

The fundamental difference between paper money 
and gold may be summarized as follows : 

Paper money is only of value in circulation, where 

it performs the social function of facilitating the 

exchange of commodities. Once put into circulation, 

the paper must stay there, because the sum of such 

7 



98 Capital To-Day 

money, however large or small it might be, is always 
equal to the total price of the commodities it con- 
fronts, and is therefore needed in circulation. Take 
away from paper the function of medium of circula- 
tion, and it becomes utterly worthless stuff. 

Gold, on the other hand, is itself value, therefore 
available as measure of value. It encounters the 
commodity as an equivalent. If the need of the 
circulating medium is lessened, gold departs from 
the circulation to take the commodity form or to 
retire into bank vaults, or anywhere else, as a hoard 
or store of value, ever ready to act as the world's 
recognized universal equivalent. In doing so, its 
own value and that of the commodity remain entirely 
undisturbed; on the other hand, a deficiency of gold 
relative to the increased value of the commodities in 
circulation may be filled, within certain limits, by 
tokens symbolizing gold, as already stated. 

Gold circulates because it has value; paper has 
value because it circulates. 

The value of commodities given, the quantity of 
gold in circulation depends on its value; the value of 
the paper in circulation on its quantity. 

The price of commodities changing, the quantity 
of gold in circulation changes ; the changing quantity 
of paper effects a change in the price of commodities. 

The circulation of commodities can absorb only a 
definite quantity of gold, but any amount of paper. 

A state is guilty of debasing coin, if it issues pieces 
ever so little below the nominal weight ; but it is con- 
sidered to be acting with perfect propriety in issuing 
tokens containing no metal whatever. 



i 



Money Tokens 99 

The foregoing considerations of an exclusive paper 
currency as a national monetary system show its 
practical impossibility. But even were such a sys- 
tem practicable, the paper would only be valid 
within the country; for the settlement of foreign 
and related obligations gold would still be needed. 
These obligations consist of government and other 
bonds payable in gold and adverse balances of account 
of the capitalists of one country with those of another. 
Whether the bonds have been placed entirely or only 
partly abroad, they are based on gold not only for 
the foreign, but for the home bondholders. The 
government, to secure the gold needed for interest 
and redemption of the principal, levies in gold certain 
imposts, especially customs duties. The gold needed 
by the capitalists is procured by them as a commodity 
at the market price and is subject to corners, like the 
one on the memorable ' ' Black Friday " in our history, 
September 24, 1869, on which day hundreds of firms 
and individuals were swept into bankruptcy. 

Passing from the consideration of the hypothesis 
of an exclusive paper currency, fixed in amount, (an 
unlimited issue involves the more serious danger 
of great depreciation), to the other extreme, an hy- 
pothesis of the exclusive use of gold as money, (minor 
coin excepted) , with limited coinage of gold, we may 
be met at the outset with the objection that this 
latter hypothesis is entirely unnecessary in view 
of the existing deficiency in the supply of gold, as 
described in a previous chapter. But there are 
many people who are under the impression that there 
exists of late years a progressive depreciation of gold, 



100 Capital To-Day 

owing to the increase in the supply now in existence, 
notwithstanding the uncontradicted fact that the 
need of gold remains undiminished, to say the 
least. 

G. E. Roberts, Director of the Mint, looked upon 
in some quarters as one of the world's highest au- 
thorities on monetary phenomena, says in his report 
for 1 91 3 on the one hand: "That there is a relation- 
ship between the supply of gold and the prices of com- 
modities scarcely admits of controversy " ; and on the 
other :'*... what results would ensue from the dis- 
covery of a cheap process of artificially producing 
gold. Will anybody contend that such a discovery 
would have no effect upon monetary . . . condi- 
tions?" If Mr. Roberts were familiar with the 
Marxian theory of value he would have realized that 
the two statements above quoted are not arguments 
along the same line, but bear on two different con- 
ditions, mutually exclusive of each other. 

The first statement connects the supply of gold with 
commodity prices. The latter are indicated by a 
given quantity of gold. If the value of gold is to be 
stated, it can only be done in terms of commodities. 
But value expresses the quantity of labor crystallized 
in a thing, and changes in value express changes in 
the quantity of labor necessary to reproduce that 
thing. Supply is not an element in the determination 
of value, but merely affects the temporary market 
price. Supply (and demand) explains the fluctu- 
ations of the market price which take place without 
there being any change in value. If supply and de- 
mand balance each other, they, like any opposing 



Money Tokens loi 

forces in nature in a state of balance, cease to exist 
as phenomena. Consequently the operation of supply 
and demand indicates nothing but a disturbance of 
the equilibrium. It cannot indicate value itself. 

The second statement supposes a reduction in the 
A''alue of gold in consequence of greater productivity 
of labor or, to use an expression better understood by 
capitalists, of lower cost of production. 

The first quotation refers to a fluctuation in the 
market price of gold, a temporary condition to be 
corrected by a change in the relation of supply and 
demand. The second quotation refers to a permanent 
change of value. 

Which one of the two contradictory statements of 
the Director of the Mint may be the true one is of 
interest to us, as we are concerned with a wide-spread 
belief that the increase in the stock of gold is the 
reason for its depreciation. 

The empirical appearances do not favor the hy- 
pothesis of a temporary depression of the market 
value of gold owing to its abundance. The concern 
about the national bank reserves and the com- 
petition in international finance for the gold, re- 
minds us rather of the too narrow blanket which is 
pulled hither and thither by several persons trying 
to keep warm. 

Also we should have expected a considerable 
diminution in the gold output as a result of the depres- 
sion of its market value and the growing unprofitable- 
ness of the mining industry. There has taken place 
not only no recession in its production, but the same 
has actually advanced from about 300 million dollars 



I02 Capital To-Day 

about the turn of the century to 466 millions in 191 2, ^ 
although during the last five years the annual increase 
has averaged only 1%. Evidently the gold mining 
industry as a whole is yielding a fair profit on the 
capital employed. Of the Witwatersrand mines, col- 
lectively the largest producers, it is known that their 
profits in 191 2 and 191 3 equaled one third of their 
output. Other African and Russian mines were not 
quite so remunerative, but one American company, 
the Goldfield Consolidated, paid out over 70% of its 
output in dividends in 1911.^ It is even possible 
that, owing to improved methods of production, or 
the easier accessibility to or the better yield of the 
ores, the profits from gold production are at present 
higher than when gold was of higher value. 

It is clear, then, that the recent depreciation of 
gold is not a matter of increased supply, resulting in 
a market price lower than the value, but of a lowering 
of the value itself. The industry continues to be 
"socially necessary labor" as much as ever, and its 
owners are not under the necessity of operating at 
less than the general rate of profit. 

The quantity idea which is uppermost in Mr. 
Roberts's mind, and which he fails to separate from 
the value idea, is derived from the paper money ex- 
periences of many countries, but it has no relation to 
gold which is itself value. The argument of all those 
who think like him amounts to this: we have pro- 
duced so much gold that commodities have so much 

^ Report of Director of the Mint, 1913, p. 314. 
* Moody's Manual of Railroads and Corporation Securities, 1912, 
p. 3998. 



Money Tokens 103 

risen in price that we have not gold enough to pay for 
them. 

It follows then that if there has actually taken 
place of late years a depreciation of gold, it is not a 
mere temporary fluctuation of the market due to 
increased supply, but a permanent change of value 
due to reduced cost of production. 

Under unlimited coinage, gold, whatever changes 
in its value might take place in one or the other 
direction, continues as the measure of value of the 
commodities which are all affected alike by the 
change. 

It is true, however, that the gold basis, which is 
inseparable from the competitive capitalist system, 
is bound to work injustice to creditors or debtors by 
any change in the value of the metal. 

The above statement that a change in the value 
of gold affects all commodities alike, calls for further 
elucidation in view of the fact that in the rise of 
prices during recent years, some commodities parti- 
cipated in a high degree, some moderately, while 
still others remained stationary. These discrepan- 
cies are due to changes in their own values or prices 
relative to the depreciation of gold. For instance, to 
quote price advances of ordinary necessaries of life 
in index numbers ^ : 





1900 


I9I3 


Advance 


Farm products 


109.5 


165.8 


49.6 


Clothing 


106.8 


123.7 


15.8 


Manufactured articles 


no. 2 


132 


19.8 



^ U. S. Bureau of Labor Statistics, Bulletin No. 149, Wholesale 
Prices, 1890 to 19 13, pp. 11, 13, and 14. 



104 Capital To-Day 

Against all the labored theories regarding the 
causes of the high cost of living we advance as the 
principal explanation the following points (realizing 
that there are contributory ones) : (i) that the com- 
paratively slight rise in the prices of clothing and 
other manufactured articles corresponds to the 
somewhat slower technical progress in the average 
manufacturing industry than has taken place in gold 
mining with its use of high explosives, compressed 
air, electric power transmission, its improvements 
in machinery, reduction processes, and transportation 
— all this combined with unparalleled auriferous 
formations, as in the Rand ; (2) that agriculture lags 
behind in technical progress, compared with gold 
mining or even with the average of manufacturing 
industries ; that while its products, with the exception 
of meat, have actually somewhat declined in value 
by reason of increasing yield per acre, due to improved 
methods of farming, their market prices advanced 
greatly from the increased demand by the rapidly 
growing urban centers to which there is no counter- 
part in a corresponding increase of the rural popu- 
lation; (3) that the rising prices of the necessaries 
of life are therefore due mainly to the reduced value 
of gold, but also to some extent to an advance of their 
market prices beyond their values, the result of mal-* 
adjustment of the labor force, which is drawn away 
from the production of necessaries toward the pro- 
duction of luxuries in which the enormous and grow- 
ing revenues of the capitalists are spent. 

It is sometimes asserted that the high freights 
imposed by the Railroad Trust are largely responsi- 



Money Tokens 105 

ble for the high cost of foodstuffs; but in Chapter 
VIII. the authority of the Secretary of Agriculture is 
quoted to show how small a percentage of their 
cost is represented by freight. 

It is sometimes thought convenient to make a case 
out of the advance in the wages of agricultural 
laborers. This advance has been considerable and is 
linked with the general rise of wages which has taken 
place. But the history of strikes teaches that they 
are more frequently defensive than aggressive, that 
they are the consequence rather than the cause of a 
higher cost of living. In spite of the rise of agricultural 
wages, these represent a declining quantity in the 
following proportion, when compared with the value 
of the crops : 

1899 7.6% 

1909 74% 

The causes indicated above as the principal ones 
which have brought about the high prices of the 
necessaries of life are in themselves sufficient to 
preclude the hope that the phenomenon may be only 
a transient one. The ascending movement of prices 
which began in 1897 is fatally connected with the 
maturing of capitalism, and a struggle against the 
high cost of living can be nothing else than a struggle 
against capitalism. 

If the depreciation of various "values," including 
tokens and bank deposits, and of the loan capital, ^ 

* One of our popular magazines runs a department for advising its 
investing readers. Each issue begins with a "Fable of Finance" 
as a text for the dispensation of some political economy in which 
the writer is not consciously fabulizing, and concludes with invest- 



io6 Capital To-Day 

as well as the rising cost of living, are hardships for 
the majority of the people, ^ then the believers in the 
supply doctrine will no doubt welcome a suggestion 
how to overcome these evils by neutralizing the 
effect of gold depreciation on the value of money. 
The realization of the hypothesis we are now consider- 
ing of an exclusive gold currency, with limited coinage, 
would during the few years needed for the demand 
to catch up with the supply of gold, effect a divorce 
between gold as money and gold as metal, in the same 
manner as some religions have effected a similar 
divorce between the spiritual man and the old Adam. 
The example of our silver dollar, the five franc piece, 
or the rupee, in their emancipation from the silver 
price, proves that their overvaluation is maintained 
not by any promise of redemption in gold, but by 
their being needed in circulation. Just so gold m.oney, 
in our hypothesis, would cease to represent gold as 
given value and instead its money value would be 
determined by the needs of circulation. Our friends 

ment advice. To him nothing but the increased gold supply has 
"decreased the value of the world's savings by one third in 15 years'* 
and advanced the rate of interest. So the rate of interest advances 
because of the greater supply of money! It is to be hoped in the 
interest of intending investors that the editor is more lucky in his 
investment advice than in his guesses at economics. 

^ David A. Wells says that prices and rents rose 90%, but wages 
only 60% between 1861 and 1866 (in spite of war and slight female 
and child labor competition). 

In the period from 1907 to 19 12, retail prices of food, as measured 
by index numbers, increased from 125.9 to 154.2 or 22.5% while 
weekly wages, similarly measured, increased from 123 to 13 1.6 or 
only 7 %, resulting in a decline of the purchasing power of weekly 
wages of 12.7% (I. M. Rubinow, "The Recent Trend of Real Wages," 
American Economic Review, Dec, 19 14, p. 812). 



Money Tokens 107 

may confidently expect to see the value of money and 
*' savings" greatly enhanced and commodity prices 
reduced. The suggestion seems perfectly simple. 
Prohatum est! 

But stop! What really would be the measure of 
value while such an exclusive gold system, with 
limited coinage, lasted? There would be none, — 
gold no more than the previously discussed paper 
tokens, except that gold coin can only be overvalued, 
never depreciated below the bullion value. 

It follows then that nothing can perform the 
function of money but a material circulating on the 
basis of its own value, supplemented within certain 
limits by tokens symbolizing that valuable material, 
which can be no other than gold. 

c. Silver tokens. 

From the beginning of the capitalist era, which may 
be allowed to coincide with the ' * modern period ' ' of 
the school histories, the ratio of value, weight for 
weight, of silver to gold, up to 1873, fluctuated around 
14-16 to I, the highest ratio during that period being 
14.14 in 1760 and the lowest 16.25 i^ 1813.' Then 
began a gradual decline of the relative value of silver 
until it reached a ratio of 26}A to i or 38^^ d. per 
ounce in 1893.' At this point the British Govern- 
ment close-d the India mint to free coinage, apparently 
without the world having an inkling of the intended 
coup, for the market price of silver dropped so to say 
overnight to 30 d. The government succeeded after 
five years of suspension of rupee coinage in raising 

* Report of Director of the Mint, 1914, p. 213. 



io8 Capital To-Day 

the exchange to the intended rate of i6 d. per rupee, 
at a time (September, 1897) when its metal value was 
little more than half of its artificial value of 43 d. per 
ounce, silver having reached then the low quotation 
of 23^d. It has already been noted in Chapter III. 
that the per capita circulation of India is a mere 
pittance: any influence of the present rupee circula- 
tion on world finance may therefore be dismissed 
from the mind as non-existent. 

The lowest price reached by silver was in 1902 and 
1903, when it touched 21 JJ d.,^ being a ratio of 
about 47 to I. During the recent advance of com- 
modity prices in general, silver about kept step with 
copper and is fluctuating (July, 1914) around 24^^ d. or 
a ratio of 42 ounces silver to i ounce gold worth 
$20 % . The fall in the price of silver had not the effect 
of curtailing its production, which through all its vi- 
cissitudes, from the time of the closing of the India 
mint until 1906, remained practically stationary at 
about 165 million otinces yearly, and from that year 
until 191 1 even gradually increased to the materially 
higher quantity of 226 million ounces in the latter 
yearj^* the larger part as a by-product in mining 
other metals. No silver mines are working in the 
United States. 

Of this production nearly 128 million ounces were 
exported to China and to India where this silver is 
used for coinage or made into ornaments, in either 
case ceasing to be a factor in the world's economy.^ 

^Report of the Director of the Mint, 1914, p. 212. 

2 Ibidem, p. 267, 

3 According to the report of the Bureau of the Mint the exports 



Money Tokens 109 

The balance remained in countries more advanced 
in capitalist economy. ' 

Thus silver, so far as it affects the economics of 
the capitalist countries, has fallen to the low estate of 
a modest commodity of very moderate total value 
produced annually. Now what about the impor- 
tance of the already existing silver stocks? 

Every country has a circulation of silver as 
required in the small transactions of daily life for 
which gold or paper, for obvious reasons, are ill 
adapted. In the last week of 1893, the year of the 
abolition of free coinage in India, the Bank of France 
held silver of the nominal value of 1261 million 



of silver from London and the United States to India, Hongkong, 
and China amounted in 1912 to 127,891,032 ounces. "The silver 
coinage of the India mints, which included British dollars for Hong- 
kong banks, required 46,971,959 ounces, and the coinage of China, 
as reported to the bureau, required 52,077,305 fine ounces, or to- 
gether 99,049,264 ounces. The remainder, 28,841,768, plus existing 
stocks at the beginning of the year, was available for industrial con- 
sumption." — Report of the Director of the Mint, 1913, p. 258. 

^ The quantity used by non-Asiatic countries for coinage and in 
the arts respectively is not given in the report, but can be calculated 
as follows: The total amount used for coinage throughout the world 
is estimated by the Director of the Mint {ibidem, p. 259) at 142 
million ounces, deducting from this 99 million ounces used for coin- 
age by Asia (see preceding footnote), leaves a balance for coinage for 
countries outside of Asia of 43 million ounces. The total industrial 
consumption is given at 99 million ounces {id., p. 259) ; deducting from 
this 29 million ounces used by Asia for the same purposes (preceding 
footnote), leaves a balance for the rest of the world of 70 million. 

It will be observed that the total world consumption of silver for 
all purposes thus amounts to about 241 million ounces, or about 15 
million ounces in excess of the world production. The difference is 
made up partly of stocks carried from the previous year and partly 
of melted old metal. 



no Capital To-Day 

francs.^ Since then (up to July 30, 1914) the Bank 
has managed to get rid of 610 millions^ in the colonies 
and in the Congo. ^ The balance may be redeemed 
by the other members of the Latin Union. 

It is only in the United States that a large stock 
of silver exists which nobody seems concerned to 
reduce. It circulates in the form of silver certif- 
icates, standard silver dollars, and subsidiary coin 
which together amounted to 748 million dollars 
December 31, 1913.'* 

We happen, alone among nations, to be loaded 
with a heavy stock of a commodity which was being 
forsaken as money material by one nation after the 
other, prior to its great degradation, and the price 
of which had been tending continually downward. 
Briefly, this is the story of the origin of this 
stock : . 

Momentary political exigencies of the Republican 
politicians (notwithstanding the natural mission of 
their party as the capitalist, therefore gold, party) 
resulted in the Bland- Allison compromise bill, 
enacted February 28, 1878, over President Hayes's 
veto. This act directed the monthly purchase at 
market prices of not less than two million dollars* 
worth of silver to be coined into dollars, which were 

^ Report of National Monetary Commission on the Bank of France, 
1910, p. 16. 

a New York Times Annalist, December 21, 1914, p. 486. 

3 Previous to the exposure of the Congo horrors, the natives were 
paid in rice and salt, that is they were given something to eat. The 
great majority of the population had died before the murders by King 
Leopold II. of Belgium and his confederates were stopped. 

4 Annual Report of the Director of the Mint, 1914, p. 205. 



Money Tokens iii 

to be legal tender.^ Under the operation of the 
act until 1890 the purchases aggregated' 291 milHon 
ounces at an average price of about $1.06 and re- 
sulted in the coining of 378 million dollars.^ 

During this period the price of silver continued to 
fall, and in the latter year the Republican politi- 
cians became afraid of losing the States controlled by 
the silver mine owners, unless they did something 
for the latter. On July 14 the Sherman act was passed, 
ordering the monthly purchase of 4>^ million ounces 
and the issue of silver certificates as legal tender, 
against the stock of metal. ^ Under this act there 
were bought 169 million ounces at an average price 
of 92 >^ cents. 

Owing to the return of securities by foreign holders, 
as already mentioned in the preceding chapter, and 
to the government's mionthly investment in silver, 
the gold reserve against the greenbacks, already 
referred to, threatened to disappear entirely in 1893, 
the year of a severe panic in the United States and 
also of the closing of the India mint, and the Sherman 
act was repealed November i, 1893. 

In 1898 the stock was ordered coined, including 
the seigniorage amounting to about 62 million dol- 
lars. This seigniorage consisted of the difference 
between the prices paid for the silver and the number 



' Laws Concerning Money, Banking, and Loans, Sen. Doc. 
No. 580, 6ist Cong., 2d Session, 1910. Law of February 28, 1878, 
sec. I, p. 579. 

' Annual Report of the Director of the Mint, 1914, p. 89. 

3 Laws concerning Money, Banking, and Loans, Sen. Doc. No. 580, 
6ist Cong., 2d Session, 1910. Act of July 14, 1890, pp. 589, 590. 



112 Capital To-Day 

of overvalued dollars which could be coined from it. 
These dollars of \\2}A grains, 900 fine, equivalent 
to 371^ grains, 1000 fine, are worth at this writing 
(July, 1 914), on the basis of the New York quotation 
of 52 >^ cents per fine ounce, 40 cents each. 

The people can now make an estimate of how much 
their peculiar institution, the politicians, has cost 
them in relation to silver. They bought altogether 
over 500 million ounces at the average price of 
$1.01^, now down to 52^^ cents. But there is no 
doubt that any attempt by the government to sell 
this stock of merchandise, in competition with the 
producers of silver, would result in a further decline 
of the market price. 

The present nominal commercial value of our 
standard dollars, 578 million pieces,^ is about 231 
million dollars. As they constitute by far the great- 
est and the only stationary stock of silver in the 
world, it is at once evident that the white metal 
has fallen to unimportance as a constituent of the 
world's monetary system. An understanding of the 
present day silver situation can only find an appli- 
cation in connection with the already mooted ques- 
tion of the gold supply and the by no means remote 
contingency of a gold famine. 

The propositions, advanced by various people, 
which might be considered before long by the gov- 
ernments, embrace the following : 

Would the establishment of bi-metallism by agree- 
ment of all nations be practicable and offer a solu- 
tion, considering 

* Report of Director of the Mint, 19 14, p. 89. 



Money Tokens 113 

(a) The difficulty of maintaining a permanent ratio 
in spite of all contingencies ; 

(b) The difficulty of preventing the accumulation 
of one metal only as reserves and hoards which may 
result from a tendency to a relatively more abundant 
production of the other metal, and the consequent 
danger of the breaking up of the international 
agreement ; 

(c) The unimportance of the now existing stock of 
silver as a prompt addition to the supply of money 
and as a basis for a ratio ; 

(d) That a large demand for coinage would raise 
the market price of silver, stimulating production to 
an unknown extent, as the price continues to rise, 
and rendering an arbitrary ratio a matter of great 
difficulty ; 

(e) The possibility of an international mint for the 
limited coinage of silver, with branches in each 
country, and the abolition of national monetary 
systems ; 

(f) The possibility of an international bank; 

(g) The time at the disposal of the governments, 
considering the urgency of the gold situation, for 
carrying into effect one or the other of these more or 
less chimerical measures of salvation. 



CHAPTER VI 

MONEY OF ACCOUNT 

Within the memory of many a man, that is 
looking back fifty years, there has arisen in this 
country a system of money of account which has 
largely supplanted or added itself to the use of 
gold and token money as means of purchase and of 
deferred payment. This money of account consists 
of deposits in the banks to the credit of the capitalists, 
who make transfers to one another on the books of the 
banks by means of written orders called checks. 

The total of these individual deposits 
(so called technically) amounted on June 
4, 1913. to $17,936,000,000* 

to which we add as similar in origin and 
economic function the surplus and undi- 
vided profits of the banks 2,287,000,000* 

and as equally logical that part of the 
capitalization of the banks which hadnot 
been paid in, but consists of profit, as for 
instance in the case of the First National 
Bank of New York, whose original capital 
of $500,000 was increased in 1901 to 

^ Report of Comptroller of the Currency, 19 13, p. 45. 
' Ibidem, p. 46. 

114 



Money of Account 115 

$10,000,000 by the distribution of a 
stock dividend of 1900%; but as no 
record of capitalization from profits is 
available, we will merely add the differ- 
ence between the alleged total capital 

of the banks $2,162,000,000^ 

and the amount of their 

reserves 1,561,000,000^ 601,000,000 

Total money of account in 191 3 $20,824,000,000 

Against individual deposits in 1863^ . . . 394,000,000 

In these same years the total current 
money in the country is reported as fol- 

lows"*: in 1913 $3,720,000,000 

in 1863 675,000,000 

It is seen that while current money has increased 
at the rate of i to 5, money of account has increased 
as I to 53. 

In what manner has this money of account origi- 
nated and what is its true inwardness ? 

Anybody unfamiliar with the history of banking 
may be pardoned for supposing, in comparing the 
figures of the deposits in 1863 and 1913, that the 
beginnings of the banks of deposit coincided with 
the rise of capitalism about the middle of last century. 
Such, however, is not the case. Banks, conducted 
with the technique of the present day, existed already 
in precapitalist times, even in antiquity. 

The banks of ancient Greece and Rome were 
primarily dealers in bullion and foreign coins. This 

» Report of Comptroller of the Currency, 191 3, p. 46. '/</., p. 43. 

3 There were no accumulated bank profits. 

* Report of Secretary of the Treasury, 1913, Table J. 



ii6 Capital To-Day 

business was a natural outgrowth of international 
trade and a technical necessity for the merchants 
traveling to strange lands for the purchase of goods, 
whither they carried gold and silver in bullion and 
in their home coins. The banks not only issued bills 
of exchange on their confreres in other cities and 
countries, but they also received deposits either on 
time against certificates of deposit, or subject to 
checks, paying interest on deposits or not according 
to circumstances, and lending the money to others 
at generally high rates of interest.^ The depositors* 
money as well as their own was used by these ancient 
banks as an instrument of exploitation of the masses, 
the agricultural workers, similar to the exploitation 
in recent centuries of the Indian ryot by the money 
lenders. Indeed, the relations of creditors and 
debtors constituted the issue in the class struggles of 
Greece and Rome, and as debts were secured not 
only by mortgage on the lard, but by bond on the 
body of the debtor, much of the chattel slavery of 
antiquity owed its existence to this source. The 
power of the state was vested in the plutocracy. In 
Athens, at the time of the enactment of a new bank- 
ruptcy law by Solon, 594 B.C., aboHshing security 
by the body, the yeomanry had largely sunk into 
debt. Caesar's adoption of Solon's law, 500 years 
later, came too late to save Rome. 

Upon the reawakening of civilization toward the 

^ "This traffic with the money of others constituted the principal 
part of the business of the money changers, although they sometimes 
employed their own money also in the same way." A. Boeckh, 
Public Economy of the Athenians, p. 176. 



Money of Account 117 

end of the Middle Ages, banks reappear in the cities 
of Northern Italy, especially in Venice and in Flor- 
ence, the latter then a great silk and woolen weav- 
ing center. Among the scores of bankers in Florence 
some attained to immense wealth, as the Medici, the 
Peruzzi, and the Bardi, the last Bardo being the 
object of George Eliot's sympathetic study in 
Romola. A general statement of the assets and lia- 
bilities of the Bardi and the Peruzzi at the time of 
their failures shows that their loans to kings far 
exceeded the amounts due their depositors. 

From the foregoing brief recital of the principal 
facts of earlier banking history it appears that, not- 
withstanding the similarity of methods with those 
of modern banking, it differed from the latter in that 
its main object was not, so far as the use to which 
the deposits were put, to aid industry and commerce. 
Modern banking represents money capital originally 
derived from the industrial productive (and mer- 
cantile) capitalists which has become specialized 
as a distinctive form of capital, having its own par- 
ticular function in the capitalist system of society, 
equally with the two other divisions of the social 
capital, the productive and the mercantile. 

The rudiments of banking by the capitalist 
class for its own purposes are to be found in the 
clearing association of the merchants of Venice and 
in the business of the private "Kassiers" of the 
Dutch commercial cities. In both cases the aim 
was of purely technical advantages, the initial act 
having been the deposit of a certain sum of money 
by the member or client for safe-keeping, and avail- 



ii8 Capital To-Day 

able for transfer to the accounts of other members or 
clients on written orders. These agencies were the 
social bookkeepers and cashiers within their narrow 
circumscriptions. With the extension of this social 
function over a wider field and the addition of trad- 
ing in credits for their own account, modern bank- 
ing was complete. 

So long as the banks (the *'Kassiers' '* original and 
principal business was dealing in foreign coin and 
bullion) or bank-like institutions acted merely in a 
clerical capacity, the category of money of account 
could not arise; they were not supposed to make 
any transfers on their books without having the 
actual cash in their strong boxes. It was only when 
increasing wealth made credits possible and safe, both 
as regards bankers and borrowers, and the use of the 
idle deposits as loan capital by and for the account 
and risk of the bankers became the practice, that 
the conditions were given for the creation of the 
new money of account and the concentration and 
specialization of money capital for a separate and 
distinct social function. 

The manner in which the present great amount 
of money of account, non-existent at the inception 
of modern banking, has been built up can be seen 
by observing what is going on continually in our own 
time, just as other sciences interpret by observation 
of present processes the great changes wrought in the 
past, when their records are not self-explanatory. 

Observe what becomes of the deposit made by the 
retail merchant of the currency taken in by him dur- 
ing the day. Being a thrifty man, who looks out 



Money of Account 119 

for all there is in the cash discount, he at once mails 
a check against this deposit to his wholesale purveyor, 
let us assume for the cost of precisely the goods sold 
that day by the said retail merchant. The amount 
of the check will be less than the deposit, because 
the retailer retains his share of the surplus value 
produced by the workers, his share being fixed by 
certain economic laws laid bare by Marx, to which we 
shall revert later. The wholesale merchant, in his 
turn, against the money so obtained, gives a check 
to the productive capitalist which likewise leaves 
behind on the wholesaler's bank account a sediment, 
representing his share of the surplus value. The 
productive capitalist now draws against the deposit 
of the merchant's check as much currency as may 
be needed in the process of reproduction for the pay- 
ment of the wages to the workers, whereupon the 
latter are ready to start at the retail counter the 
second rotation of the currency. The same thing 
occurs daily not only with the revenue of the workers, 
but partly also with that portion of the revenue of the 
capitalists which the latter use for their individual 
consumption. 

This rotation of the currency in which the banks 
are a channel of passage is repeated every day and 
as often increases the sediment on each capitalist's 
account until the accumulation of these sediments, 
which are plainly nothing but profits, suffices for 
the settlement between the capitalists of their mu- 
tual obligations by simple transfers on the books 
of the banks. In proportion as the settlements 
by mere transfers on written orders or checks in- 



I20 Capital To-Day 

crease, the relative importance of current money as 
a constituent of the daily deposits decreases. The 
latter consist now in the United States, as they have 
done since many years, of about 94% checks and 
about 6% current money. The deposits of money 
of one day are generally drawn from the banks on the 
next day, in the interim counting as bank reserves. 
Gold is very largely, and standard silver dollars almost 
entirely, withheld by the banks from circulation. 
Currency continues in the main to be needed only 
for the country's weekly or fortnightly payroll and 
for part of the individual consumption of the capital- 
ists, the other part being paid by them in checks. 

If the profits of the individual capitalists con- 
stantly accumulated as current money in the banks 
and were kept intact by the latter, except as with- 
drawn by the selfsame capitalists, it is evident that 
after a time the greater part of a country's stock of 
money would be virtually locked up as hoards in bank 
vaults and that an extreme scarcity of the medium 
of circulation would ensue. But then the banks 
would not be banks, but mere custodians and dis- 
bursers of the money of their clients. The revenue 
of the banks, however, is not derived from any pay- 
ment for the services of storage and handling of 
money, but from interest on loans made with their 
depositors' money. This constitutes essentially the 
business of a bank. But the current money deposited 
in the banks on one day is used freely by them the 
next day to pay any applying depositor, and thus 
the money reenters regularly the general circulation 
(except for a certain reserve fund) . In fact the loans 



Money of Account 121 

made by banks no longer consist of current money 
but of titles to money. They transfer to borrowers 
the titles to money vested in the depositors, without, 
however, any cancellation of the depositors' titles, nor 
with their legal consent. In other words the banks 
transmute the profit accumulations of the industrial 
capitalists, which are for these in money form, into 
debts owing them by the banks. On the other hand 
the banks, in their name and for their own account 
and risk, become creditors of their borrowers. The 
banks' debts., known as bank deposits, function as 
money in a somewhat similar manner to the gov- 
ernment's non -interest-paying debt, its notes, the 
difference being that the former are private, the 
latter social debts. 

Now how can the banks respond to the normally 
large demands for money by their depositors who 
never formally consented to the diversion of their 
funds, which are in fact supposed to be ever at their 
disposal ? 

It operates in this manner: depositor A draws a 
check on bank Y for $100, depositor B on bank 
Z for $90. A's check in the usual course is deposited 
by the payee in Z, B's check by the other payee in Y. 
The two banks exchange the checks they hold against 
each other, Y paying to Z the difference of $10. 
Collectively the two banks have liquidated two 
debts aggregating $190 without having paid out a 
cent. This is not necromancy; the performance was 
made possible because two new depositors or creditors 
for the identical amounts took the places of the 
former ones. But what if depositors were to call 



122 Capital To-Day 

extensively or universally for actual repayment to 
themselves, that is, without furnishing substitute 
creditors? That would be quite a different case 
about which we shall have more to say later. 

Money of account, then, as represented in bank 
deposits and in the bank's own surplus, is that part 
of the capitalists' revenue which has for the time 
being not been realized in money, but only in a title 
primarily to money and secondarily to value in 
general. 

Let us clearly understand this point. 

The total annual product of labor, beyond the 
reproduction of old value, is a certain exact quantity 
of which one portion serves in the form of wages to 
reconstitute and perpetuate labor power, while the 
other portion constitutes the revenue of the capi- 
talists and landowners. No other value has been 
created. 

This product of labor appears as a mass of com- 
modities, including the money commodity — gold. 
Money of account is not a product of labor, therefore 
not of intrinsic value itself, any more than token 
money. Both are mere titles to value. They 
differ in this, that while the token has the form of a 
social debt to the individual holder and is therefore 
a legal tender in discharge of private obligations, 
money of account has the form of a debt owing to 
individual depositors by private institutions and is 
therefore not a legal tender. Not being value, the 
sum of money of account added during the year can- 
not be something produced in addition to or aside 
from the year's product value. It is a record kept 



Money of Account 123 

by the banks, as social bookkeepers, of part of the 
value newly created, namely of that part of the 
surplus value, appropriated by the capitalist class, 
which exists at any time in money form. It is also 
a record of the constantly changing share of each 
capitalist in the total surplus value or his individual 
profit in money form. 

The sum added annually to the previously existing 
money of account represents profits. But while the 
former is an intangible creation of the mind, mere 
bookkeeping, the thing it represents is concrete and 
very definite. So are the annual profit additions 
to the capital account on the ledger of an industrial 
concern, which profit additions appear there in terms 
of dollars, purely creations of the mind, but the 
profits, as seen in additional buildings, machinery, 
raw materials, etc., are none the less real for not 
consisting of actual dollars. Profit is that part of the 
new product value for which the workers received no 
equivalent from the capitalists. The surplus product, 
for which the latter did not pay, is integrally united 
with, and indistinguishable from, the part of the 
product for which they did or will pay. But it is 
only the element of unpaid surplus product, metamor- 
phosed by its sale into the money form of its value, 
which can give rise to the formation of additional 
money of account. That part of the proceeds of the 
sale which represents merely preserved value and 
wages, in other words the money capital advanced 
for production, is merely restored, and the money 
returns to its point of departure. In having made 
the sale the capitalists have effected the first phase 



124 Capital To-Day 

in the necessary exchange of commodities, the trans- 
formation of the commodity into money. They now 
hold the money form of the commodity value which 
must perforce complete the second phase of the ex- 
change of commodities, viz., the transformation of 
money into commodity by purchase for the individual 
consumption of the capitalists or of means of pro- 
duction. The second phase is forced, because 
continuous selling without buying — that is, the con- 
tinuous movement of commodities in one direc- 
tion with a continuous movement of money in the 
opposite direction — is an absurdity. Commodities 
must be exchanged with each other, and this is only 
possible through selling and buying with money. 
All monejT- of account is destined to complete this 
exchange which at any given moment it has left only 
half performed. 

True, some industrial concerns abstain from actu- 
ally transforming all their money into commodities. 
They withdraw part of it from its circulation as 
industrial capital and divert it to the sphere of 
land-ownership and of fictitious capital, the latter 
consisting mainly of shares, bonds, and real estate 
mortgages. Land prices and fictitious capital are 
subjects the more lengthy discussion of which we have 
to defer to another chapter. In connection with our 
immediate subject it is only necessary to state that a 
conversion of industrial capital into land-ownership 
or fictitious capital amounts to a transfer of money, 
therefore of title to commodities, to the sellers of land 
or fictitious capital who now become the buyers of 
those commodities in the place of the industrial 



Money of Account 125 

capitalists. The purchase of commodities must 
always be the outcome. Useful labor and the con- 
sumption of the products is the economic alpha 
and omega of any form of society, no matter into what 
intricate forms those simple objects may be clothed. 
If the sellers of land and securities, or others in their 
places, refuse to consume, production will be reduced 
correspondingly. 

If it is clear, then, on the one hand, that profit is a 
concrete thing, the surplus product of the workers 
which is appropriated by the capitalists, and if, on the 
other hand, money of account is the money form of 
part of that profit and yet not value, what has 
become of the concrete substance, the product of 
labor ? 

The productive capitalists, who were the owners 
of the surplus product, have parted with it by sale 
and accepted from the buyers their checks in pay- 
ment. The latter may have consumed the great bulk 
of the goods, while the sellers have become the 
possessors of an accumulation of checks. These are 
transferred from one to the other as money, but there 
is no recourse in case of non-payment against the 
original creators of this money of account, those who 
consumed the goods. Whether these checks will 
prove to be good in the end or whether they will 
eventually be rubber-stamped "No Funds" is 
another question which we shall have to consider 
later. 

In view of the fact that the goods, by the sale of 
which the money of account has been built up, have 
partly (at the point where we have now arrived to a 



126 Capital To-Day 

still unknown extent) been consumed, it follows that 
the steady increase in the volume of money of 
account is by no means reflected in a corresponding 
increase in the value of the stock of commodities 
which are to satisfy the money titles. The extreme 
example of the consequences of a great war will 
serve best to make the point clear. 

A war may cost daily a number of millions as the 
regular money expense of the armies concerned. It 
is spoken of as a loss of money. In reality there is no 
destruction of money. The governments pay it over 
to the purveyors of supplies who in their turn circu- 
late it further in the usual course. What has taken 
place is the consumption of commodities without 
any reproduction whatever, so far as the combatants 
are concerned, and with but curtailed reproduction 
by the civilians of those articles which are ordinarily 
consumed by the people at large, partly to give way 
to the increased production of war materials. The 
effect is a rise of prices, first of the class of com- 
modities which had been mainly consumed — the ne- 
cessaries of life. This coincides with a temporary 
decline of the prices of commodities not absolutely 
necessary, or which may be classed as luxuries. But 
eventually, in consequence of the price advance of 
the necessities, all other commodities follow suit. 
The latter effect is of course conditioned on the 
workers being able to maintain their standard of life. 
Evidently the accumulated imaginary and real 
money as the value form of former commodities may 
lack the necessary counterpart of present com- 
modities for its realization. 



Money of Account 127 

Money of account, therefore, being a title to and 
representing current money, is the money form of 
value of sold commodities and held for the time being 
for completion of the exchange against other com- 
modities (which may or may not exist at the time). 
After each act of circulation it continues to exist as 
before. It is indestructible, except either by the 
theoretically normal process of conversion into cur- 
rent money, which, as we shall presently find, is 
possible only to an exceedingly small extent; or by 
the theoretically abnormal process of the failure of 
banks of deposit. Therefore, in the absence of pri- 
vate hoarding and bank failures the sum of money 
of account always goes on increasing; it never 
decreases. 

But just what is the mechanism of increase ? If C 
receives a check from D which realizes for C the 
money form of newly created value, namely his 
profit, that money is not newly created money. It 
is a transfer of money which previously existed in 
D's possession. Evidently no amount of check 
payments can account for the continual increase 
in deposits, no matter how much new value may 
constantly be produced. If we hold fast in our mind 
for a moment, the same as if it could be a reality, the 
absurdity of an exclusive money of account, no other 
money whatever existing, we realize at once that 
the constantly growing commodity value would have 
to be circulated by transfers of money of account, 
the sum of which would be stationary — fixed once 
and for all. An inventory of the year's accumulation 
of the capitalist class would show that the same 



128 Capital To-Day 

consists entirely of commodities; none of it would 
appear in money form. 

But, really, we already have the answer to our 
problem. We have observed how our friend, the 
retail merchant, deposited currency which included 
his profit. If we follow merely that part of it which 
represents profit (the part which represents capital 
advanced for production necessarily returns to its 
source for reproduction) we find that it presently 
passes out of the bank as concrete money to continue 
its perpetual journey. But the departed concrete 
money has nevertheless left behind its shadow on the 
credit side of the retail merchant's deposit account. 
The money has apparently doubled : the reality ex- 
isting in general circulation as current money, the 
shadow existing in the bank as money of account. 
This remarkable independence of the shadow from 
the substance, and the daily repetition of the wonder, 
opens the prospect of endless increase of such 
shadows produced by the identical money substance, 
until the mass of the latter becomes quite insig- 
nificant compared to the extent of its own shadows. 
The social belief in this wonder rests on the faith 
that all these shadows can easily be resubstantiated. 

In the world of reality an inventory of the year's 
accumulation of the capitalist class shows that the 
same consists not only of commodities, but also of 
an addition of a quantity of gold or current money, 
supposed to exist, and to which money of account 
is the title. 

Money of account is a record of profits which at 
any given moment are realized in money form, but 



Money of Account 129 

not in money. It is only a nominal realization. 
The actual realization of profits consists of commod- 
ities (the existing stock of means of production and 
means of consumption) and gold, and it includes 
also the individual consumption of the capitalists 
for which the identical money or money of account 
has served as means of purchase over and over again 
throughout the years. It would be incorrect to in- 
clude in the realization of profits the market price 
of the land and securities. There can be no con- 
crete existence of profit, but in the product of labor. 
It is clear, then, that the current money deposited 
in the banks is derived partly from the consumption 
of the workers, which part is withdrawn again from 
the banks in current money by the depositors in order 
to use it over again for the payment of wages. An- 
other part is derived from those items in the indi- 
vidual consumption of the depositors for which they 
paid in current money, not by checks, which part they 
will again withdraw from the banks in current money 
for the renewal of their individual consumption. 
All that part of the deposits of current money which 
is again withdrawn from the banks by depositors 
for consumption, whether directly for their own con- 
sumption or indirectly (by way of wages) for con- 
sumption by the workers, canceling such deposits 
pro tanto, fails to increase the volume of money of 
account. It is only that part of the profits which 
remains as capital accumulation, and as such is lent 
by the banks to other capitalists, which increases 
the volume of money of account. For this to be true, 
it is by no means necessary that the banks make 
9 



130 Capital To-Day 

loans of actual current money. The deposits of the 
latter had increased the banks' loanable funds and 
the money reenters circulation in consequence of 
the loans. The current money passing out of the 
banks as a direct consequence of loans leaves the 
volume of money of account entirely unaffected, just 
because it is drawn against loans and not against 
deposits. Of course, current money drawn from the 
banks against loans may be used by the borrowers 
for their individual consumption or in payment of 
wages, but for the borrowers it remains the money 
of the lenders, and only becomes new money in the 
hands of the capitalists or workers who receive it 
for commodities (products or labor power). In 
short, current money drawn from banks by deposi- 
tors reduces the volume of money of account, but 
not that drawn by borrowers. 

Another factor continually at work tending to 
check the growth of the volume of money of account, 
which would otherwise proceed much faster than it 
does, exists in the constant withdrawal of current 
money from the banks, now by one productive 
capitalist, now by another, for the purpose of enlarg- 
ing their scale of production, principally for the pay- 
ment of additional wages. This process represents 
a permanent conversion of money capital, having for 
its owner, as a deposit, the form of a quiescent loan 
to the bank, into active industrial capital for which 
thereafter the bank is a mere point of frequent 
passage. Such conversion of money capital into in- 
dustrial capital, or bank deposits into current money, 
does not automatically increase the mass of the 



Money of Account 131 

latter. The immediate effect is that the existing 
mass of current money has to do more work than 
before ; it must circulate ever faster, until after a time 
a point is reached when the issue of additional paper 
money imposes itself. 

We have said above that the volume of money 
of account never decreases. This is practically 
the case, in spite of the currency withdrawals follow- 
ing closely on the heels of currency deposits. But 
to be quite precise, some recessions of deposits having 
actually occurred, it is necessary to draw attention 
to the fact that all individual deposits are not identi- 
cal with money of account. The deposits include 
at any given moment a certain element which does 
not consist of money at all, cash or checks, and is 
in reality contrary to the theory of banking, though 
in practice unavoidable. When a depositor takes up 
a loan at his bank, the amount (less the interest) is 
credited to his regular deposit account. Thus the 
addition to the bank's loan account is offset by what 
appears as an addition to the bank's deposits. This 
nominal deposit disappears only when the borrower's 
checks, issued against the loan, reach the bank, 
usually within a few days. The extent of ' ' deposits ' * 
of this kind on any given day is not published, 
but it is evident that a contraction of loans, apt 
to occur during a crisis or during the depression 
immediately following, may become a cause of 
recession in the volume of deposits without any 
actual (temporary) recession in the volume of money 
of account itself. Such recessions occurred during 
or after the panics of 1893 and 1907 to the extent 



132 Capital To-Day 

of ^% and 2^% respectively of the total of in- 
dividual deposits. ^ In the latter panic a larger crop 
of bank failures than in normal times, with lia- 
bilities of 210 million dollars,^ added to contraction 
of loans, which ordinarily appear as deposits, are 
amply sufficient to account for the recession in the 
total of the deposits, in spite of the accumulation of 
cash in the banks, due to the reduced need of money 
in active circulation. 

However, occasions do arise when the practice 
of crediting loans to the deposit accounts of the 
borrowers may assume such great proportions in a 
comparatively very short time as to make it seem that 
a rapid and wonderful increase of the existing money 
of account has taken place. Such an occasion 
presents itself when there takes place in a country 
within a limited period a material increase in its 
stock of current money, as, for instance, through 
the inflow of gold from abroad in consequence of a 
strong swing of the balance of international obli- 
gations in favor of such country. This gold reaches 
the banks, in whose possession it constitutes an 
addition to their free and available cash reserves. 
A similar result ensues when by legal enactment a 
reduction is authorized in the percentage of cash 
reserves hitherto required to be held by the banks 
against their deposits. The liberated part of the 
former compulsory reserves now becomes available 
as a reserve for new loans, in the same way as the 
imported gold. 

^ See Comptroller's Report, 1913, p. 44. 
^ Ibidem^ p. 73. 



Money of Account 133 

Now, when an applicant for a loan appears in a 
bank, must the official, before granting the loan, 
know whether he has an actual surplus of money 
of account to lend ? By no means ! All he needs to 
know is whether the bank has any cash in excess of 
the legal requirement, and if so, he is free to grant 
loans against its surplus reserve in the same pro- 
portion as deposits bear to legal reserve without 
regard to any preexisting money of account. Pres- 
ently the loan is credited to the borrower's deposit 
account, and presto ! the bank has an asset in the form 
of a loan, offset by a liability in the form of a deposit, 
against which latter the former surplus reserve now 
serves as legal reserve. There will be ample oppor- 
tunity to observe this feat in the operation of the 
new Federal Reserve Act, which reduces the per- 
centage of reserves to be held by member banks from 
about 20% to about 15% on demand deposits, (on time 
deposits the reserve requirement is much lower, and 
mutual savings banks carry only about >2% of their 
deposits in actual cash'). If then, by this reduction 
of 5% in the legal reserve requirement, a bank finds 
that it has a surplus of $15,000 free and available as 
a reserve, it may lend $100,000. It is consequently 
clear that any increase in the amount of free money 
held by the banks may lead to an expansion of loans 
to the tune of six times the sum of the former. 

What enables banks to indulge in this practice is 
the general knowledge that the other banks are 
doing the same thing; that therefore all checks 

^ Seve iteen million dollars against deposits 3770 million dollars. 
See Comptroller of the Currency Report, 19 13, p. 65. 



134 Capital To-Day 

drawn against such loans, meeting at the clearing 
house, are likely to balance each other approximately 
without any unusual strain on any one bank by large 
demands upon it for cash to settle clearing-house bal- 
ances. If, nevertheless, the single bank notices that 
the clearing-house balances against it are growing 
heavier, it will take the fact as a sign that it must 
reduce its loans. But in any event the money paid 
into the clearing house by one bank passes on to 
another bank, which can in its turn use it as legal 
reserve, so that it is correct to say that any surplus 
reserves furnish the basis in the United States for 
about six times as much of new money. 

This new money is not money of account within 
the definition given by us to this term. It is a new 
category for which we refrain from supplying a new 
name. So far as the borrowers are concerned, this 
new category is indistinguishable from money of 
account. But its distinctiveness from the latter is 
very important, first, to the banks who lend this 
bank-made money, and secondly, as regards its 
general economic effect. 

The bank which makes loans up to the amount of 
checks received by it on deposit, in other words 
against its available money of account, has the cer- 
titude that its debits at the clearing house cannot 
exceed its credits. 

On the other hand, the bank making loans, not of 
money of account, but of a kind of money which 
represents only its promise to pay, does so on the 
general knowledge that other banks are engaged in 
the same practice, but the extent to which this may 



Money of Account i35 

be the case at any particular time or in any particular 
locality remains a matter of surmise. The banks, 
making loans on the surmise that everything will go 
right at the clearing house, instead of on positive 
foreknowledge to that effect, may find themselves 
facing surprises. The timely reduction of outstand- 
ing loans is not always easy. 

The creating of money, so purely imaginary as this 
bank-made kind, must aggravate further a banking 
situation already sufficiently delicate. 

Aside from this specifically financial difference 
between money of account and the bank-created 
kind, there exists between them a difference in their 
general economic effects. 

Money of account consists of the orderly, legiti- 
mate, and gradual accumulations of capital in money 
form by the individual capitalist concerns. Indus- 
trial development depending on such accumulation 
tends to remain normal. 

On the other hand the possibility of creating — deus 
ex machina — billions of money, not representing any 
labor performed previously, but mere mutual prom- 
ises to pay, can have no other effect than initiating 
a period of abnormal expansion, speculation, and 
extravagance. 

The chance of earning interest on a sum of money 
of which only one sixth is a reality, while the other 
five sixths are a mere figment of the mind, is not one 
by which the lenders, the banks, will ordinarily fail 
to be tempted. 

On the other hand the sudden abundance of loan- 
able money and the prospect of a "business boom'* 



136 Capital To-Day 

stir up the spirit of enterprise in all those able to 
borrow, with few conservative exceptions. While it 
is historically true that modern industrialism was 
conditioned on a sufficient accumulation of money 
(which Mexico and Peru began to furnish in the 
sixteenth century), yet the production of a plentiful 
substitute for money by hothouse methods can only^ 
end in a panic. 

About all the official political economists of our 
day and other writers on finance declare that if such 
a panic occurs, it will be the result of exaggerated 
commodity, land, and security prices, themselves due 
to the increased supply of money and its consequent 
depreciation. Their vagaries are due to a firm 
resolution not to listen to the scientific theory of 
value. 

After the creation of all these promises to pay, or 
titles to money, is there any difference in the regard 
in which a dollar in gold, a dollar in paper, or a dollar 
in a check are held? No, they are on a parity. 
There has been no inflation of the paper tokens, hence 
no depreciation of the same. The titles to money 
are still sustained by the faith in the social solvency. 
The promises to pay in standard money, or in symbols 
thereof, are still believed to be good. Therefore all 
these substitutes of gold circulate on the basis of the 
value of the latter. Has this value declined, because 
of the activity of the paper mills? Have the latter 
brought about a reduction in the cost of mining gold? 
And if not, have the mines stopped working because 
of the decline in the exchangeable value of gold? No, 
we shall hear nothing of that; the mines, with un- 



Money of Account 137 

changed cost of production, will still be working 
profitably. 

What really has occurred is an increased demand 
for means of production, resulting in the advance, not 
of their value, but of their prices, as well as eventually 
of the prices of articles of consumption, land, and 
corporation shares. It is the violent deviation of 
price from value which is precarious and which calls 
for rectification by the violent means of a panic. 

Now we have arrived at the point when we may 
consider the question : 

How good are these titles to money? 

In the first place they are not titles to gold, but 
only to legal tender. Should the tokens which are 
such tender depreciate relatively to gold the money 
of account would depreciate in exactly the same 
measure. 

In the second place these titles are only enforceable 
by the owners against the banks as technically their 
debtors. We have seen above that the accumulation 
of profits to the extent that they are concentrated in 
the banks, and so far realized only on paper, amount 
to 20,824 million dollars. Out of this sum 17,936 
millions represent practically profits of industrial 
capitalists in the shape of claims against the banks. 
To satisfy these claims in money the banks had on 
the same date, as also stated above, 1561 million 
dollars. That is they held less than nine cents in 
money against every dollar they owed. But, it may 
be thought, if the creditors demand their money, the 
banks could convert their other assets into money. 
For money it now must be, the real thing — no make- 



138 Capital To-Day 

believe. The checks had been deposited , theoretically 
tor collection of their amounts in money ; if the bank, 
instead of collecting the money, had squared with 
another bank, holding a similar check against itself, 
that is its own affair. Now, where is the money to 
pay for the banks' assets which are to be realized? 

On June 30, 19 13, the stock of money in the United 
States was distributed as follows^: 

United States Treasury $ 356,000,000 
Banks as reserves 1,552,000,000 

Active circulation 1,812,000,000 



Total $3,720,000,000 

The banks cannot get the money of the govern- 
ment which is held as reserve against the greenbacks 
and for current expenses; they also cannot get the 
money in circulation, and needed in circulation, 
because the moment they were to stop the exit of 
currency, its deposit by the capitalists would stop 
likewise. Besides they would be confessing their 
insolvency and expose themselves to bankruptcy. 
During the panic of 1907 the banks generally were 
obliged to suspend payment; on that occasion, how- 
ever, only comparatively few, like the Knickerbocker 
Trust Co., were actually forced into bankruptcy, but 
the storm will not always blow over so easily. 

Thus there remains, as the only thing that could 
be thought of, the exportation and sale abroad of the 
bank assets. These, however, are mainly non-export- 

» Report of Comptroller of the Currency, 19 13, p. 54. 



Money of Account 139 

able, the principal item being real estate mortgages 
and promissory notes. So far as their holdings of pub- 
lic securities are concerned we already had occasion to 
note in Chapter IV., section h, that the export of a 
relatively small amount of these had to be made at 
panic prices ; for the payment of the entire indebted- 
ness of our banks we know that the gold in the whole 
world would only half suffice, while on the other hand 
insistent selling by this country at any price would 
mean the utter extinction not only of American, but 
of the whole world's fictitious capital. All banks in 
the world would fail — it would be a social cataclysm. 

For when men have been seized with doubt as to 
the convertibility of their titles to money into the 
substance, the cry for money will not cease at the 
paying tellers' windows as long as there are unpaid 
depositors. But the disparity between the mass of 
the illusory money of account and the means of its 
realization is too great to be overcome. 

Without closer examination the impression might 
arise that this disparity might be very materially 
lessened by the banks' refusal to honor the checks 
of depositors who are at the same time their debtors. 
Such action on their part would be arbitrary, the 
claims of such persons as depositors being very 
generally due before their debts to the banks. 
Nevertheless the banks would be successful in their 
attitude, assuming a disposition on the part of the 
judges to come to the rescue of the banks and of 
society. Now, what is the extent to which the banks 
might repress the demand for money? 

Of their total loans, amounting in round figures to 



140 Capital To-Day 

l^.}4 billions,^ eight billions are secured by real 
estate, stocks and bonds, warehouse certificates, etc., 
by borrowers having generally no direct banking 
relations with the lending bank. For instance, 
savings bank depositors are not borrowers, call and 
time loans against collateral security are open market 
operations. Of the remaining 6)4 billions, judging 
by the proportion of double name to single name 
paper held by the national banks, it would seem that 
one third of these unsecured loans represents com- 
mercial paper bought by banks in the open market 
through brokers. The makers of this class of paper 
have no relations with its holders, do not even know 
their names. Thus out of the entire sum of eighteen 
billion deposits, probably not more than four billions 
represent accommodation loans by banks direct to 
their own depositors, and as the latter are supposed 
to maintain an average balance of one fourth or one 
fifth of their loans on deposit, the total sum that the 
banks might succeed in holding up would be under 
present conditions about one billion. The difference 
would not raise the ratio of the current money held 
by the banks to the money of account to ten cents on 
the dollar, instead of nine. 

And yet, as we have seen, money of account has 
been increasing ten times as fast as gold and token 
money combined. We shall see in section b of the 
next chapter that for a number of years past this rate 
of increase has grown to be twenty fold. If the capi- 
talist class continues to be blessed with prosperity in 
the future as in the past, its bank account will arrive 

^ Comptroller of the Currency Report, 19 13, p. 51. 



Money of Account 141 

at the point where it will rest on a comparatively 
infinitesimally small basis — the proverbial pyramid 
nicely balanced on its apex ! This feat the capitalist 
class will have to perform with its bank account. 

Already in the panic of 1907 money of account was 
at a discount of as much as 5 per cent, compared not 
alone with gold, but with any kind of current money, 
and it remained at a discount for a month. So long 
as the conviction abides with every capitalist that he 
can personally make good his title to money at any 
moment, he will of course abstain from doing so, 
especially as checks are more handy and otherwise 
more advantageous. If it were only a question of the 
transfer of money of account from one depositor to 
another, their relative titles to value would remain 
unchanged under any circumstances. But transfers 
without purchase of commodities, such transfers as 
loans, settlement of losses, etc., can only be incidental 
to the regular course of the exchange of commodities ; 
and the capitalists who own the commodities are, as 
such owners, not identical with the capitalists who 
own the money of account and will only part with 
their commodities, which are absolute value, against 
money of account so long as the latter' s realizability 
in other values remains undoubted. But if confi- 
dence is shaken, it is only a question of the degree of 
severity of the resultant panic, to what extent the 
money of account may be depreciated, or whether it 
may become extinguished altogether, carrying down 
in its debacle not only the superimposed system of 
fictitious values of all kinds, but the entire capitalist 
system of society. 



142 Capital To-Day 

At first sight it might seem as if such complete 
destruction would affect only one division of capital, 
the fictitious, and would leave intact all real capital 
values. A little reflection, however, will suffice to 
show that such an impression would be erroneous. 
Of what use to the capitalists would be the owner- 
ship of mills, machinery, and other fixed capital, 
without the money wherewith to buy the necessary 
materials and to pay wages? Or of what use to a 
man would be a warehouse full of such a most neces- 
sary product as flour, if he cannot obtain money for 
it? And the money practically does not exist. Real 
money, even in the heyday of capitalist prosperity, 
cut but a small figure in the sum which was needed 
to do the world's business. Now a great part of the 
gold and silver will have gone into hiding, as a 
provision against the most pressing needs. What 
had but a short time ago been believed to be money 
is now recognized as having been a stupendous 
deception of great advantage to the capitalists while 
it lasted. The time has now matured when the mills, 
machinery, merchandise, etc., have ceased to serve 
their owners as the means of garnering profits; they 
have become as barren to them as sources of revenue 
as their now worthless pieces of lithographed "secur- 
ities." They have lost their artificial, though his- 
toric, character as capital and are waiting to assume 
their natural character as means of production, no 
longer of commodities, but of use- values. Com- 
petitive capitalism had come to rest on a fiction and 
was an economic impossibility. 

Before leaving this special inquiry, it is worth while 



Money of Account 143 

to take a closer look at the deposits in the savings 
banks, which are included in the above total deposits, 
on account of the wide-spread belief that these par- 
ticular banks represent the savings of the working- 
man. This unfounded belief is taken advantage of 
by the capitalists, whenever some political issue is 
raised inimical to their interests, in order to enlist 
the support of the wage workers on the ground of the 
latter's interest as capitalists. This appeal to the 
self-interest of the workers as capitalists is of a piece 
with that other in which the capitalists, unselfishly 
forgetful of themselves, work on the sympathy of the 
general public for the widows and orphans who must 
make shift, poor things, to live on their income from 
stocks and bonds, which income is held up to the 
public conscience, as if it were the principal interest 
menaced by said political issue. 

Without losing our time with the bedevilment of 
the question by the Comptroller of the Currency in 
his report of 1913, where he makes out (p. 57) 17,600,- 
000 savings accounts, including therein any deposits 
at interest in any kind of bank, let us at once direct 
our attention to the mutual savings banks, the only 
ones in which working people deposit savings. These 
the Comptroller reports (p. 65) as having 3770 
million dollars deposits from 8,101,238 depositors, 
the average being $465.31. 

Now, this information about the number of de- 
positors and their average deposit is absolutely mean- 
ingless, as we shall understand presently. 

First as to the number of depositors. This subject 
was most fully investigated in Massachusetts as early 



144 Capital To-Day 

as 1872 by the Bureau of Statistics of Labor which 
reported: "Repeated instances were found of men 
having in each of many banks deposits to the Hmit of 
the law. . . . One man was reported to have a 
deposit in each bank of the State ; another will deposit 
for each member of his family and a part of the 
alphabet." From these facts it is plain that deposi- 
tors can, to comply with the law, easily multiply 
their persons many times, and that the number of 
accounts is no indication as to the number of de- 
positors 01 to the importance of their deposits in- 
dividually. 

Now as to the average deposit. If Mr. Rockefeller 
has a billion dollars and I nary a dollar, the two of 
us own on the average half a billion each, but I fail 
to derive any satisfaction from the calculation. The 
Massachusetts Bureau just mentioned found that in 
1 87 1 one fourteenth of the deposit accounts amounted 
to nearly one half of the total in amount and that the 
proportion of large depositors in the savings banks 
was on the increase. 

From what we have learned from the Bureau 
regarding plural depositors, it is clear to us that one 
fourteenth of the deposits is by no means equivalent 
to that proportion of depositors. And what of those 
only nearly as large? However, the statement fur- 
nishes a sufficient index to the fact of real interest 
that, while the immense majority of depositors may be 
wage workers, the great bulk of the deposits are those 
of capitalists. Considering the workingmen's de- 
posits, not in relation merely to their depositors, but 
to the wage-working class in its entirety, it will be 



Money of Account 145 

found that this class which constitutes the over- 
whelming majority of the American people is prac- 
tically penniless. 

Since the publication of the Massachusetts report, 
which at the time created an awkward situation for 
the high tariff manufacturers of Massachusetts, who 
pleaded then, unselfishly forgetful of themselves, for 
the protection of the American workingman against 
the pauper labor of Europe, similar publications have 
been suppressed and it is preferred to leave the ques- 
tions involved in a fog. Recently a demand has 
been voiced by a number of social welfare people in 
Chicago and New York for the publication of the 
classification of savings banks deposits according to 
amounts. Such publication would be instructive only 
to a limited degree on account of the plurality of 
deposits representing the identical ownership. The 
only way to admit the light is by removing the 
limitation of amount which may be deposited by 
anyone and recognizing the savings banks in law as 
what they are essentially in fact — investment con- 
cerns for small capitalists and middle-class people. 

Under the capitalist system of society production 
is carried on primarily for profit and only secondarily 
or incidentally for consumption. Things are pro- 
duced as commodities and exchanged on the open 
market on the basis of the labor socially necessary for 
the production of each. Profit is made possible by 
the existence of one particular commodity, human 
labor power, whose use-value consists in its ability 
to create for its purchaser value in excess of the cost 
of production of human labor power, viz., the usual 
10 



146 Capital To-Day 

wages of subsistence. The "open market" (also 
called "liberty") meant in capitalist theory produc- 
tion under fairly equal conditions and exchange of the 
products without artificial restraints (a condition 
called "natural law"). This ideal was approached 
only in the youth of capitalism, when England was 
the only industrial country in the world. The 
capitalistic monopolies and the trade unions of our 
time are denials of capitalist theory and they herald 
the coming end of competitive commodity produc- 
tion. 

This system of production was only possible with 
the social recognition of a single exclusive commodity 
as money. Gold, in having been set aside for the 
money functions, has not lost the attributes of a 
commodity, as all gold money can be used as a 
commodity without loss of value. 

These functions are contradictory between them- 
selves. Insufficiency of the money commodity is 
a necessary condition for its function of standard of 
value. But this very requirement of insufficiency 
renders gold utterly incapable of fulfilling its other 
functions of means of circulation and of deferred 
payment. The contrivances of money tokens and 
money of account, to take the place of the needed but 
deficient gold, are admissions of the fact. These 
emblems have heretofore functioned tolerably in lieu 
of gold, only occasionally giving rise to difficulties. 
But the continuous and irresistible growth of the mass 
of these emblems, and the increasing disparity in 
the proportion of this mass to that of the gold, renders 
their parity more and more precarious and will ulti- 



Money of Account 147 

mately make it impossible. The financial system 
has operated, though with creaking and cracking, on 
the strength of the social faith that it will never be 
subjected to much worse than normal strain. How- 
ever, it is plainly to be foreseen that the more 
artificial the system becomes, the more it is liable to 
call forth crises of increasing severity. An untoward 
event of sufficient magnitude, especially a great war, 
may put such a strain on the financial mechanism 
in all countries as to produce the most tremendous 
consequences to the form of society to which this 
mechanism is indispensable. The degree to which 
society loses faith in symbols of money expresses 
itself in their depreciation relatively to gold. The 
depreciation of paper money carries with it that of 
bank checks. 

Now what effect would an important depreciation 
of emblematic money have on the economic condi- 
tion of the world? 

That kind of money has been created to the extent 
that the gold would have been needed at any given 
time. Every dollar of it had passed from hand to 
hand as the equal of a gold dollar. Now it is found 
that the world's stock of money, as expressed in the 
value of gold, is reduced say by 25%, 50%, 75%. 
The destruction of billions of money cannot be made 
good by printing more tokens. No matter how great 
their mass, their sum would always represent the same 
total money value. If former stringencies in the 
money market have resulted in periods of industrial 
depression, with wide-spread unemployment and 
misery, what may be expected if say half of the 



148 Capital To-Day 

existing money value is destroyed? How carry on 
the industries on the then existing scale? How 
conduct international business after a country has 
parted with its gold or hoarded it, whether in a cen- 
tral fortress or in many stockings? 

That the United States came unscathed out of the 
depreciation of its greenbacks to as low a value as 
thirty-five cents for the gold dollar cannot be cited as 
an argument against our thesis. That happened prior 
to the great financial expansion, in a single country, 
then neither financially or industrially of the highest 
importance. It was able to draw on Europe for the 
needed money. The condition will be altogether 
different when depreciation is international and 
simultaneous; when, owing to the very fact of the 
reduced value of emblematic money, the banks of 
the world are subjected to an abnormal strain by the 
demand for gold or for such large sums of tokens as 
would match the gold; when all nations would fain 
borrow gold, but no nation can afford to lend. And 
when the world's banks find it impossible to meet the 
unprecedented and never in the past contemplated 
demands for money, then no man living can fail to 
see that the financial mechanism, a tool whose use- 
fulness in its day can scarcely be exaggerated, has 
broken down finally and irretrievably. Necessity 
will then prompt everybody to put his hand to the 
removal of the debris and the bringing of the New 
Order out of the chaos. 



CHAPTER VII 

TOTALITY OF THE MONEY SYSTEM IN THE UNITED 

STATES 

a. Conditions prior to Federal Reserve Act, 

In Chapter VI. has been shown the division or 
ownership of the stock of money in the country as 
between the Treasury, the banks, and individuals, 
the latter division representing the active circulation. 
We shall now have to see what are the kinds of money 
of which this stock consists. It is reported Nov. i, 

1913,' as follows: 

Million 
dollars 
Gold inclusive of gold certificates representing 

stored gold 1,636 

Silver inclusive of silver certificates representing 

stored silver 554 

Silver subsidiary 1 60 

United States notes 344 

National bank notes 723 

Total outside of Treasury 3,417 

In addition to a gold reserve of 150 millions against 
the United States note circulation, the government 

* Report of Secretary of the Treasury 19 13, p. 78. 

149 



150 Capital To-Day 

held on June 30, 191 3 about 200 million dollars in 
gold, tokens, and bank deposits for current expenses 
and other purposes, which fund we leave out of con- 
sideration as not materially affecting our purpose. 
Equally without practical importance are discre- 
pancies between statements issued a few months 
apart, reflecting such minor changes as result from 
current transactions. 

The only absolute legal tender is gold coin, which 
in the above specification is lumped with the gold 
certificates, as the latter can be converted into the 
former on presentation at the Treasury, which holds 
the corresponding coins. 

Standard silver dollars (similarly lumped with the 
silver certificates convertible into them) and United 
States paper currency are legal tenders, but may be 
eliminated by contract. This is being done in the 
issue of bonds by the government and by the cor- 
porations through the stipulation making the principal 
and interest payable in gold. 

Bank notes are not legal tender. 

Grouping the currency as to value we find: 

Million 
dollars 

Money of full value (gold in circulation)... . 1,636 

Silver having an average value of 39%, 

nominal value 7^4 

United States paper, covered to extent of 

150 million dollars in gold 344 

Bank notes not covered by value 723 

As to that part of the currency which is issued by 
the government, we have already noted above that 



Totality of Money System in U. S. 151 

the law permits a distinction to be made by contract 
between gold and the tokens. Such a legal distinc- 
tion between the two kinds of money appears as a 
contradiction to the gold standard law of 1900, which 
directs the Treasurer of the United States to main- 
tain all the forms of money issued by the United 
States at a parity with this standard. 

If it is sufficient for the maintenance of the parity 
to give the necessary legal directions to the Treasurer, 
and if these are expected to be acceptable, as equiva- 
lent to fulfilment, to the lending capitalists (espe- 
cially in foreign countries) , the buyers of our long term 
bonds, there would seem to be no reason for the 
existence of such a contradiction. But in reality the 
lending capitalists understand full well that there can 
be no dependence on the continuance of the parity 
on the strength of a mere declaration of purpose to 
maintain the parity. 

The demand promissory notes of the banks are 
private credit instruments issued against another 
kind of credit instruments, viz.. United States bonds, 
deposited by the banks with the Treasury together 
with 5% cash as a redemption fund against the event 
of the failure of any banks. These notes are re- 
deemable at the banks of issue or at the Treasury in 
legal tender. If we contemplate what would happen 
in case of a general scramble for money of value, this 
would be the picture: The holders of 150 million 
dollars greenbacks would draw out the gold reserve, 
leaving the holders of 194 million dollars greenbacks 
in the lurch; the holders of bank notes might have to 
accept silver tokens of a low intrinsic value or 



152 Capital To-Day 

greenbacks which might turn out to be convertible 
into gold or into nothing ; or the holders of bank notes 
might retain them until the eventual redemption by 
the government, in gold, of the bonds which were 
security for the notes. 

Practically in the question of parity between tokens 
and gold neither the credit of any government, nor 
the particular metal in which the tokens may be 
redeemable, nor their irredeemability is involved. 
Their usefulness as a circulating medium depends 
solely on their quantitative limitation relative to 
the minimum circulation requirement of gold in a 
country at any given time. Tokens may be aug- 
mented with an increase in the stock of gold, but not 
independently of the latter on pain of their deprecia- 
tion. The full bearing of this principle may not be 
realized by those who think only of the fact that our 
country has passed through a period of depreciated 
paper currency without fatal consequences. These 
failed to arise because of the general confidence in 
the ability of the government eventually to work out 
of the situation, which was then not complicated by 
a top-heavy money of account. The case will be 
altogether different, if the logic of the development of 
capitalism leads to a deadlock, — the need of ex- 
pansion of the currency on the one hand, and the 
impossibility of such expansion on the other hand. 
For the token is ruled by the gold — that gold from 
which an anarchical society cannot emancipate 
itself. 

Grouping now the country's total cash resources in 
their three main qualitative divisions, we have: 



Totality of Money System in U. S. 153 

Million 
dollars 

Gold (1636 free, 150 in treasury) 1,786 

Token money (deducting 150 covered) 1,631 

Money of account 20,824 

The parity of token money with gold, we repeat, 
depends on the limitation of the issue of the former 
relatively to the latter; the value of the money of 
account depends on the value of the tokens and on its 
being readily redeemable in them or in gold. 

Any shrinkage in the sum of money used in circula- 
tion, owing to industrial depression or declining 
prices, affects solely gold, which, as absolute value, is 
retired, hoarded, or exported without loss, at a time 
when commodities or securities would have to be 
sacrificed, whereas tokens are only of value in cir- 
culation. Acting on these premises, the banks main- 
tain their more permanent reserves in gold and are 
generally able to hold on to at least half of the free 
gold.^ Of course, the banks are bound to have in 
their possession at any given moment large sum.s of 
tokens, but they pass them on by preference, and so 
it happens that in contrast to their heavy holdings 
of gold (or gold certificates) , the bank notes in their 
possession on June 4, 191 3, were only 107 million 
dollars or one seventh of the total issue. 

But among the public nobody thinks of discriminat- 
ing between different kinds of paper money, and 
naturally so — they are all on a par and circulation is 
rapid. 

The necessary gold basis of competitive capitalism 

* Annual Report of the Comptroller of the Currency, 19 13, p. 37. 



154 Capital To-Day 

and the incompatibility of this basis with the irre- 
sistibly growing mass of money of account is a sign 
of the approaching maturity of capital and a part of 
the general contradiction between the old individual- 
istic form of society and the developing need of social 
regulation of social functions. 

Capitalists are not inclined to take a serious view 
of the problems involved. No ruling class ever 
estimated at their true value the forces making for 
its undoing. The capitalists' cheerful view is that 
panics have come and panics have gone, and after 
each one we grew richer than ever before; that no 
doubt there will be runs on banks again, and if the 
small cash reserve is in danger, we can suspend pay- 
ments, the same as in 1907, when, nevertheless, only 
a few banks were forced into bankruptcy; in short 
that nothing different from the past will happen in 
the future. 

The main source of this view lies in the ignorance 
of those expressing it regarding the age of the present 
form of society. They believe society has been con- 
stituted as at present for a very long time. But the 
capitalist form of society has not existed for a very 
long time, and especially its greatest development, 
including the creation of the entire mass of money of" 
account, is a matter of very recent history. The 
development of the system of fictitious money is 
progressing at such a furious rate that there is no 
telling how soon the hour may come when it may be 
wrecked by its negation of the theory of value. 

The belief that what has never happened before 
will not happen hereafter, while comforting in some 



Totality of Money System in U. S. 155 

cases, is in contradiction to the theory of evolution, 
which is as apphcable to human affairs as to things 
in nature. In its very money system, quite apart 
from other vital problems which will confront it, 
changed conditions will challenge capitalism to prove 
that it need not be superseded by a superior organiza- 
tion of society. 

h. Federal Reserve Act. 

The experiences during the panic of 1907, when the 
banks stopped payment and currency went to a 
premium over checks, have furnished the ostensible 
grounds for the enactment on December 23, 1913, of 
the "Federal Reserve Act," of which the principal 
purpose, as stated in the Act, is "to furnish an elastic 
currency." By the term "elastic" currency is or- 
dinarily meant one having the faculty of expanding, 
when required by the need of an increased circulation, 
and contracting when that need is decreasing. To 
be sure an elastic currency is needed by a form of 
society which is not master of its material affairs 
and therefore finds itself swept periodically from the 
height of prosperity into the depth of economic 
depression. We know that the element of elasticity 
inheres only in gold, which, being value, is as free to 
leave circulation as to enter it. 

Now, the panic of 1907 had been ascribed to the 
lack of elasticity in our present monetary system, in 
which the currency was a given maximum quantity 
limited, once and for all, by the definite government 
issue thereof, and limited also by the sum of govern- 



156 Capital To-Day 

ment bonds which could serve as security for the 
issue of notes by the national banks. Such a criti- 
cism of a system of money, consisting partly of gold 
and partly of tokens, is based on the belief that the 
tokens can be made to furnish the element of elasticity, 
and on this alleged belief the new banking and cur- 
rency law has been enacted. 

What was really patent in 1907 was the insuffi- 
ciency of the cash holdings of the banks to meet the 
demands of the depositors for their money; at no 
time since has there been discernible any sign of 
redundancy of the currency. It could therefore 
only be said that the currency was deficient in elas- 
ticity in the direction of expansion, which is a matter 
of course, inasmuch as the mass of the circulating 
medium must depend on the existing quantity of gold, 
and this cannot be increased at will. But it could 
not be argued that elasticity did not exist in the 
direction of contraction by gold dropping out of 
circulation when not needed. Instead of stating the 
purpose of the Act by the current and threadbare 
expression, "to furnish an elastic currency," which 
does not quite fit the case, it would have sounded 
less pleasing, perhaps, but would have been more to 
the point, to have described the purpose of the Act' 
as instituting new machinery for the issue of an 
additional kind of paper money. The utmost extent 
to which this issue may take place cannot be foretold, 
but the workings of the new system will be about as 
follows : 

The national banks, and probably many State banks 
as soon as the State laws shall have been amended, 



Totality of Money System in U. S. 157 

will be associated together in twelve Federal Reserve 
Banks, located in as many cities, each member bank 
becoming a stockholder pro rata of its capital and 
surplus, three per cent, being contemplated, although 
calls up to six per cent, are provided. The President 
of the United States appoints the governing body of 
the Federal bank system, the Federal Reserve Board, 
consisting of seven members, including the Secretary 
of the Treasury and the Comptroller of the Currency. 
The system, as we already see, is partly private, 
partly governmental. The stockholders are entitled 
to a cumulative dividend of 6% per annum before 
the government derives a revenue from surplus pro- 
fits. As the President is the head of one of the politi- 
cal parties which is in power, his appointm^ents to the 
Board, if confirmed by the Senate, are apt to express 
the wishes of the ruling party with regard to the 
policy of the Federal banks. The capital of these 
will be further made up by the mandatory transfer 
to them of about a third of the member banks' 
cash reserves and by the government's deposit of its 
cash assets (money belonging to it, not that held by 
it in trust). The total capital of the new banks will 
thus at the beginning be about 600 millions dollars 
gold. 

Of course, this is not new gold — a legislative act 
cannot produce that, though it may produce new 
paper money. This gold, either in its yellow, glitter- 
ing reality or by representation, had been lying else- 
where, mainly in bank vaults, as "reserves," doing 
nothing, just waiting for something to turn up. 
The ownership of money being a social title to profit 



158 Capital To-Day 

under capitalism, the sterility of all these "reserves** 
goes against the grain of the standard ''human na- 
ture *' of the capitalist epoch. Thus arose the idea 
of "mobilizing the reserves,** realized now by the 
enactment of the Glass- Owen law without specific 
statement of such being one of its purposes, although 
this favorite expression is as euphonious in its way 
as "elastic currency" in another. 

It must not be imagined that the word "reserves** 
means a sum of money laid aside in order to be 
immediately available in a time of sudden stress. 
The word includes all cash funds held by the banks, 
including those which they need in the regular course 
of their everyday business and which are as necessary 
to them daily, in the most calm times, as their tellers* 
windows. 

Why were these reserves removed from one place 
to another? Because in their new place they are 
under the control of the government, which is to 
mobilize them with a vengeance by issuing two and 
one-half to nearly three times as much paper money 
against them in accordance with the following 
method : 

After a member bank has lent to somebody say 
$1000 and received for this sum a promissory note or 
similar evidence of debt (commercial paper) , it can 
have this note rediscounted by the reserve bank with 
brand new government bills, provided said member 
bank has $400 gold on reserve with the reserve bank 
or can produce that much gold from its own vault. 
Then the member bank can lend out the same $1000 
for a second time, and can continue the operation as 



Totality of Money System in U. S. 159 

long as it can take $400 gold from its reserves, which 
are idle anyhow, and transfer them to the reserve 
bank. 

Appreciation of the opportunity thus afforded to 
the banks to make an additional profit was expressed 
by Newton D. Ailing, Vice-President of the National 
Nassau Bank, New York, as reported in the New York 
Times of Dec. 21, 19 13: 

What would an intelligent manager of a mercantile 
business do if he were afforded an opportunity to invest 
10 per cent, of his capital in something which could result 
in at once doubling the capital at his command? He 
would seize it. This is exactly what is afforded to the 
national banks by the Federal Reserve Act. 

The initial capital of the reserve banks of about 
600 million dollars will furnish the groundwork for 
the issue of new paper tokens to the tune of 1500 
million dollars. The quantity of gold in the land 
will have remained unchanged, but the paper cir- 
culation will have increased by 1500 million dollars. 
Nor is this all. As other than national banks join 
in the reserve system or avail themselves of it 
indirectly through member banks, and as the gold 
certificates which still circulate rather freely among 
the people are more assiduously collected by the 
banks for reserve bank purposes, the new paper 
tokens will further be augmented to an extent limited 
only by the available gold required as reserve against 
the new paper tokens and by the degree of discretion 
exercised by the Federal Reserve Board, there being 
no limit set by the law itself. And during all this 



i6o Capital To-Day 

time there is no increase in the gold ; on the contrary 
this might have occasion to exercise its contractile 
faculty, after the tokens have furnished the dem- 
onstration of their power as the expansive element 
of "elastic currency." 

As the greater part of the new reserve notes will 
be issued in the rediscounting of commercial paper 
having not over ninety days to run, it might be held 
that the reserve board could, on indications of an 
approaching squall, retire notes b}^ refusing renewals 
of discounts. Who cannot already hear the outcry 
of the involved capitalists that such action will pre- 
cipitate the worst panic, etc.? Will the board have 
the nerve to weather the storm of protest raised by 
them? Besides commodity prices may have adjusted 
themselves to the inflated volume of currency, which 
therefore will be actually needed, as set forth in 
Chapter V., Sec. h. 

But we are forgetting all about the bank deposits 
as a sort of protection to which, though found inade- 
quate in the emergency of 1907, the gold was once 
held. Of course, nobody can serve two masters,. and 
the gold cannot at the same time serve as a protection 
to the bank deposits and to the new government 
notes. If it had been the purpose of the Federal 
Reserve Act to concentrate the banks for times of 
stress only, under the management and with the aid 
of the government, their maintenance of the former 
volume of individual reserves would have become 
correspondingly less imperative for the time being. 
But these Federal Reserve banks have a wider scope 
than that ; they are expected year in and year out to 



Totality of Money System in U. S. i6i 

earn their expenses, including no doubt the mainte- 
nance of a number of branch offices, pay a dividend to 
the stockholders and a revenue to the government. 
They are to be in active business in fair weather, as 
well as in foul, and the easy money obtainable 
through the banks when all is well will not fail to 
stimulate the enterprise of the capitalists. And 
when the test comes for the new currency to prove its 
elasticity by coming to the relief of the money market 
in time of panic, said currency, or rather the gold 
necessary for getting it, will be " introuvable, " — 
unfindable, — as the French say, having already been 
absorbed in the general capitalist expansion. 

The situation then existing will resemble that in 
which we see the banking system of Great Britain 
and Ireland, thus referred to by a standard author- 
ity ^' "The deposits in the savings banks have now 
(end of 1905) increased to upwards of ;£2o6,ooo,- 
000," "but of cash ... in reserve against a panic 
— the savings banks have not a sixpence." "They 
hold securities of the best kind," but "if in a gen- 
eral panic there were a run on the savings banks, 
those banks could not sell £100,000 of consols with- 
out the help of the Bank of England." '*This is 
only a single additional instance beyond . . . innu- 
merable ones." 

In this state of affairs this authority has "pointed 
out a deep malady," but being "a system of credit 
which has slowly grown up" "it is of no manner of 
use proposing to alter it," any more than "try to 

» Lombard Street^ by Walter Bagehot, chap, xiii., p. 332, edition 
of 1910. 

II 



i62 Capital To-Day 

alter the English monarchy and substitute a re- 
public," — ^which would of course be the height of 
absurdity. 

Speaking of the ratio of cash to bank deposits in 
general, the same authority says^: "The amount of 
that cash is so exceedingly small that a bystander 
almost trembles, when he compares its minuteness 
with the immensity of the credit which rests upon 
it." 

It is perfectly clear that if the Bank of England 
fails all other banks in Great Britain and Ireland are 
liable to fail. Heretofore it has been possible on 
several occasions to save the Bank of England from 
failure by breaking the Peel Act, ^ from which it can 
by no means be concluded that the issue of fiat paper 
money will accomplish the same purpose in the 
future. Obviously we are living under a system 
which is becoming more artificial every day and is 
bound sometime to come down like a house of 
cards. 

On the one hand the great addition to our token 
money endangers the gold basis ; on the other, the 
reserves, even with the addition of the whole issue 
of tokens, successfully maintained at par with gold, 
cut but a small figure when confronted with the cry 
for the cashing of i8 billions of money of account. 
■And the money of account, from formerly less than 
ten times, is now growing twenty times faster than 
the money of value ! 

With the collection by the banks of all the gold in 

^ Lombard Street, by Walter Bagehot, chap, i., p. l8. 
* See Chap. IV., Section b. 



Totality of Money System in U. S. 163 

the land, except that held by the Treasury, and the 
transfer of the gold to the reserve banks for the pur- 
pose of obtaining 2^ times its amount in paper 
money, the cash reserves which the banks are re- 
quired to maintain in their own vaults and which by 
the act are reduced to about one quarter of their 
former proportion to demand and time deposits, will 
consist entirely of the tokens which accumulate in 
the banks in the ordinary routine of receiving deposits 
of currency and subsequently paying the same out 
again. Deposits will have lost all direct connection 
with gold, but must perforce have indirect relation to 
it on account of the value relation of the tokens to the 
gold. This indirect relation therefore remains highly 
important. The following figures show the enor- 
mously growing disparity between money of account 
and gold: 

Millions 
Individual deposits,' surplus, and profits in 191 3 20,185 

'' 1908 15,031 
Increase 5,154 

Gold in the country^ in 1913 1,897 

" 1908 1,615 
Increase 252 

The increase in the volume of individual deposits, 
bank surplus, and undivided profits since 1908 is 
seen by the above comparison to be proceeding at a 

' Comptroller, 1913, pp. 44 and 45. 
» Director Mint, 19 13, p. 62. 



i64 Capital To-Day 

rate twenty times greater than that of gold. In other 
words against every dollar gold added to the national 
supply during the five years from 1908 to 19 13, 
there have been created twenty dollars in money of 
account, aside from any increase of the latter which 
may be hidden from view by the issue of stock divi- 
dends by banks against their accumulated cash prof- 
its. In 1908 the increasing gold production reached 
the high- water mark and has since remained station- 
ary. Authorities are not aware of any new sources 
from which an additional supply might be expected 
in the future, notwithstanding the fact that gold 
mining is a profitable industry. 

To restate the matter in a few words : every dollar 
gold is expected to serve as a guaranty of value of 

(i) $20 money of account ; 

(2) Any possible increase in the ratio in which 
money of account may be created hereafter as com- 
pared with any increase in the gold supply ; 

(3) $1 token money; 

(4) Any addition to the token money from the 
operation of the Federal Reserve Act or from any 
further issue independent of that act. 

In other words the entire money system is to rest 
on a basis of gold to which recent development 
assigns a narrowness of 4>^% of the whole, and which 
is subject to further contraction from the causes 
above recapitulated. 

Between the Frankenstein monster of its bank 
account on one side and the gold to which it is chained 
on the other side the capitalist class is indeed con- 
fronted by a problem. 



Totality of Money System in U. S. 165 

In thus criticizing adversely the Federal Reserve 
Act, we are far from impugning the motives or 
questioning the ability of the men who had a hand in 
the enactment of the same. It is perfectly true that 
the old monetary system was inelastic, but only so 
far as paper tokens were concerned. It was certainly 
not more inelastic than that of England, where 
nevertheless there is no agitation for currency 
reform. However, it would not be correct to judge 
of the needs of one country by those of another. 
It is equally true that the need of money is con- 
tinually growing with the increasing value of com- 
modities which are to be circulated ; but a permanent 
augmentation of paper money is not stated as the 
object of the act. At the same time the increase 
in the amount of money of account goes on automati- 
cally, and its supply is always equal to the demand. 
It is only a matter of employing more clerks at the 
clearing houses to double the amount of exchanges. 
But the sum of money of account bears a relation to 
the sum of gold, as shown in the preceding chapter. 

The need of additions to the volume of money is a 
concomitance of the growth of money of account. 
This need gold, so sorely deficient, is unable to fill. 
Recourse must be had to paper money. The Federal 
Reserve Act will provide paper money on a more 
systematic and comprehensive plan than the previous 
expedient of the Aldrich-Vreeland emergency cur- 
rency instituted in consequence of the experiences in 
the panic of 1907. There is no occasion, and there 
has been no intention, to consider the act from the 
narrower point of view of the financier who must 



1 66 Capital To-Day 

necessarily be guided in his actions by the empirical 
conditions he has to meet directly, conditions to 
which he is subject and which he cannot change. 
It may be readily admitted that nobody could have 
suggested a better financial measure than this act. 
It may also be granted that the members of the Fed- 
eral Reserve Board, on whom will rest the responsi- 
bility of governing the new system, will always be 
men of the highest moral and professional qualifica- 
tions. Yet the Federal Reserve Act must fail as a 
solution of the money problem. No legislation 
can reach down to the bottom of that problem. For 
in the stage we have reached in social integration 
man is not master of his economic affairs. They 
rule him. 



CHAPTER VIII 

the cycle of industrial capital 

Formula : 

m c ( p )....C M 

f means of production 
money commodity-j ... (productive process) COMMODITY MONEY 

( labor power 

Just as the development of the individual animal 
from the cell to the adult represents, more or 
less clearly, the story of the origin and develop- 
ment of the species, so does the new individual 
industrial enterprise repeat the origin and develop- 
ment of its species — the capitalist system of produc- 
tion. It may not be necessary to recall here that the 
original industrial capital was derived largely from 
the older merchants' capital and usury capital, no 
more than it is necessary here to inquire into the 
origin of any money which in our time begins its 
career as industrial capital. It is sufficient to know 
that it exists and appears for the first time in the 
chosen sphere of production. 

Marx divides Industrial Capital into the following 
component elements : 

(i) Constant Capital, consisting of the means of 

production, inanimate things which cannot of 

X67 



1 68 Capital To-Day 

themselves increase in value, therefore a given 
or constant quantity ; 

(2) Variable Capital, the living labor power which 
adds value to the product. 

Constant Capital he subdivides into : 

Circulating or Liquid Constant Capital, such as raw 
materials and accessories; whereof the value is 
transferred entirely to the new product ; 

Fixed Capital, such as buildings, machinery, work 
animals, whereof only the wear and tear is trans- 
ferred to the value of the product. 

Industrial capital in the course of its function 
passes through the following stages which together 
are called its cycle : 

m — c money transformed into commodities (means of 

production and labor power), 
(p) arrest of circulation by the productive process 
resulting in a commodity of greater value than 
the elements of its production. 
C — M COMMODITY (of increased value) transformed 
into and returning as MONEY (including the in- 
crement) to its starting point. 

The value added to a commodity during the 
process of production beyond the value of the ele- 
ments which entered into it (labor power, liquid* 
constant capital, and wear and tear of fixed capital) 
is called by Marx, Surplus Value. 

It is not within the purpose of this work to restate 
with even approximate adequacy the Marxian analy- 
sis of surplus value. The same bears directly on the 
relations of capital and labor which have not under- 



The Cycle of Industrial Capital 169 

gone any material change since Marx formulated 
the theory of surplus value on the groundwork of his 
theory of value. The significant changes since his 
time affect directly only the relations of the capi- 
talists to each other; although indirectly these 
changes are of transcendent interest to the working 
class. However, an understanding of the theory of 
surplus value is indispensable for an understanding 
of the complete fabric of the capitalist system of 
production. For the sake of those readers who are 
not as yet familiar with Marx's Capital, the following 
brief outline of the general theory is inserted. 

We have seen in Chapter II. that the value of 
commodities is determined by the quantity of labor 
socially necessary to produce them. Since labor 
power is a commodity, its value on the market is 
determined by the same factor, in other words by 
the cost of its perennial production or reproduction. 
But labor power differs in one important respect from 
other commodities in that it is the only commodity 
which during its consumption (the act of labor) 
replaces the consumed value besides creating addi- 
tional value. Thus while the capitalists buy labor 
power at its exchange-value based on part of a work 
day, they enjoy its use-value during a whole work 
day. For that part of the working time which is in 
excess of the necessary work time (necessary for the 
reproduction of labor power) no equivalent is paid 
to the worker. The increment thus accruing to the 
capitalists in the value of the product, beyond the 
value of the elements of production, is surplus value. 

The rate oj surplus value expresses the proportion 



170 Capital To-Day 

which the surplus value created bears to the wages 
paid. It is the capitalists' share in the value pro- 
duced by labor, as measured by the worker's share. 

Profit is surplus value considered in its relation 
to the capital advanced for production. The rate of 
profit is the surplus value, as measured by the capital 
invested. 

The surplus value produced by the workers in any 
establishment is not necessarily equal to the net 
profit realized by that establishment. Its net 
profit is generally only the residue of the surplus 
value remaining as its share, after having relin- 
quished part of the surplus value to other capitalists 
or their retainers under the titles of merchants' 
profits, interest, rent, premiums of insurance against 
losses caused by bankruptcy, theft, burglary, exces- 
sive fire risk, etc., the cost of advertisers, lawyers, 
politicians, and judges,^ and under various other 
forms. But the total profit appropriated by the 
capitalist class equals (though not entirely, on 
account of constant depreciations) the surplus value 
surrendered by the workers. 

The proportion of the actual (not nominal) revenue 
of the workers in their collectivity to the revenue of 
the capitalists in their collectivity in the entire 
manufacturing industry of the United States, includ- 
ing in the revenue of the capitalists the part of the 
surplus value paid over by them to landowners and 
retainers, is shown in figures arrived at by a calcu- 
lation based on the United States Census found 

^ See W. J. Connolly's series of articles in Everybody s Ma^azine^ 
1913, "Big Business and the Bench." 



The Cycle of Industrial Capital 171 

on pages 174-175. These figures of the Census are 
confirmed by a similar elaboration of statistics 
furnished by another source, the New Jersey Bureau 
of Statistics, found on pages 183-184, relative 
to the important silk industry in that State. This 
industry is of undoubtedly average organic com- 
position, that is, one in which the proportion of con- 
stant to variable capital represents the average of 
manufacturing industries. 

That some people are aware of the fact that the 
division of the product between the capitalist and 
the worker is effected on about the basis deducible 
from the Census figures here referred to, is shown by 
an address delivered at the University of Maine 
commencement in the spring of 19 14 by Mr. Marshall, 
Vice-President of the United States, in which this 
sentence occurs : 

** Sixty years later [from 1850] the proportion had 
changed to less than one fifth to labor and more 
than four fifths to capital." 

Previous to the present era of capitalist produc- 
tion, during that of simple production of commodi- 
ties, the worker owned his tools, with which he 
produced some special kind of commodity in accord- 
ance with the historical development of the division 
of labor. His wants, however, were manifold, and 
to supply the same he exchanged his special product, 
value for value, with his various equals. In this 
exchange money played only the fleeting r61e of first 
serving as a measure of equivalence and then to 
facilitate the exchange of one product into various 
other products of various quantities, as required at 



172 Capital To-Day 

various times by the worker. It was this commodity 
which circulated, the direct substance of social 
alimentation and digestion, not money. When we 
say money did not circulate during pre-capitalist 
production we mean that its movement was centri- 
fugal in contrast to its centripetal movement in the 
capitalist system of society. In the latter, money, 
after describing a circle, returns to its starting point 
augmented by profit. On the contrary when our 
old friend, the weaver, had realized the money value 
of his linen, he started some of the money traveling 
along the line of his fellow- workers. It first reached 
the butcher, then the baker, then the candlestick 
maker, and ere long the weaver himself was in the 
line again, not on account of anything uncompleted 
in his previous transaction, but for the purpose of 
effecting a similar metamorphosis with a fresh lot 
of linen. The underlying principle of that system of 
society was production for the purpose of consump- 
tion. Its formula was 



-m- 



The essence of the circulation was 



The capitalist mode of production substitutes for 
the pre-capitalist formula c — m — c the (abbreviated) 
formula 

m c M 

Capitalist circulation begins with money and ends 
with more money. 



The Cycle of Industrial Capital 173 

Its essence is 

m M 

which is in fact the formula of loan capital in its 
modest 5 or 6% sort of way. 

c — c represents different qualities, equal 

quantity. 
m — M represents identical qualities, unequal 

quantity. 

Profit is revealed as the sole motive of capitalist 
production. 

Money was a fleeting medium in c — m — c. 

Alas ! that the commodity cannot be made equally 
fleeting in m — c — M. 

The ideal is m — M, and from its standpoint pro- 
duction is merely an unavoidable evil. And it is 
this ideal which at one time or another has inspired 
every capitalistic nation and started it on a course 
of mad speculation. 

However, the capitalist class has almost overcome 
this unavoidable evil by the development of the 
large corporation. Whereas in the early days of 
capitalist production, the individual capitalist per- 
formed a conspicuous function in the system of 
production by his personal command of labor, that 
service is now delegated to managers, superinten- 
dents, engineers, accountants, etc., salaried by the 
corporation. The stockholders do not as much as 
attend the annual meeting for the election of directors, 
contenting themselves with depositing in their 
banks the dividend checks received by mail. 



174 Capital To-Day 

This is by no means the first time in history that 
economic evolution deprived an originally useful 
ruling class of its social function. The early feudal 
lord performed a social service in donning his armor 
to defend his territory and its population. But 
his descendants were relieved of this hardship and 
instead of armor donned velvet coats and silken 
breeches to attend court functions, none the less 
maintaining their claim to tithes on the mere ground 
of their ownership of the means of production. The 
French Revolution ended the purely parasitic exist- 
ence of this class. 



CALCULATION, BASED ON UNITED STATES CENSUS, OF 
PROPORTION OF WAGES AND SALARIES TO SURPLUS 
VALUE ACCUMULATED IN THE MANUFACTURING IN- 
DUSTRIES IN THE YEAR I9O4. 

(Unit — I million dollars) 
Value of manufactured products in 1904 

(13th Census of the United States, 

1910, V. viii.. Manufactures, p. 32) 14.794 

Cost of materials (Census of Manufactures 

1905 part i., p. ci.) : 

Raw materials 8,059 

Accessories: fuel, mill supplies, oil, 

waste, freight, rent of power and 

heat, packing boxes and wrapping 

paper 445 

Wear and tear : values given in Census 

of Manufactures, 1905, part i.. Table 

XV., p. Ixv., as land 980, buildings 

1 99 6, machinery 3489 . Report adds , 



The Cycle of Industrial Capital 175 

p. Ixv: ''Rent paid for land, build- 
ings, and machinery, $73,267,209. 
If this gross rent were capitalized 
at 8 per cent., it would represent 
$915,840,112 as the value of rented 
property." Machinery included in 
rent, aside from some power ma- 
chinery, can have reference only to 
shoe and other patented machines, 
all of which is a negligible quantity. 
Separating the value of rented 
property in the same proportion as 
owned, we arrive at totals: 
Land 1282 

Buildings 2610 2% 52 

Machinery 3489 (4 to 

10%, say) 7% 244 296 

Taxes, real estate and general 
(13th Census U. S., 1910, v. 
viii.,p. 129) 59 8,859 



Value added by labor 5i935 

Divided (Census of Manufactures 
1905, part i., table xix., p. Ixxi.) 
as follows : 
Wages 5,470,321 workers 2,612 
Salaries 5i9»75i employees 575 



Total 5.990,072 54% 3,187 

Owners of 216,180 estab- 
lishments 46% 2,748 



100% 5,935 



176 Capital To-Day 

PROPORTION OF WAGES AND SALARIES TO TOTAL SURPLUS 

VALUE 

Per cent. 
Proportion of wages and salaries to product 

in sphere of production 54 

Rent of dwelling, in proportion to wages generally 

per cent 25. 

less maintenance 15% of 

rent== 3.75 

less profit 1.25 2.50 
" depreciation (off -set by 
increase in land value) 
* * taxes for common pur- 
poses I of rent 3.33 

5-83 

Net 19.17% 
of/evenue of 54% 10 

balance for all other necessaries of life 44 

Profits to middlemen 50% (see below) 22 

Ultimate realization by workers and employees of 

value produced 22 

Total surplus value retained by capitalists of 

value produced 78 

100% 

As seen on the preceding page, the workers consti- 
tute eleven twelfths of the persons who run the manu- 
factures. Of the consumption of the workers the 
New York State Food Investigating Commission 
say in their report dated August i, 19 12 (from 
which also all the following facts are taken) that food 



The Cycle of Industrial Capital 177 

supplies "make up from 40% to 50% of the entire 
budget of the famiHes of laboring people. There 
are over 25,000 establishments selling food products" 
(in New York City) (p. 23), "one store to every 
250 persons" (p. 7), instead of "retail stores capable 
of supplying 25,000 to 50,000 people each" (p. 33) 
in properly distributed buildings owned by the city 
and operated, under supervision as to prices, etc., of a 
State commission on markets, by one corporation at 
limited profit (p. 36). At present "commission men, 
receivers, wholesalers, jobbers, speculators, storage 
men, retailers, and truckers make profits or charges 
against the stuff which aggregate from 40% to 
70% of the amount finally paid by the consumer" 
(p- 35)- This would make an average of 55%; 
adding only 5% profit for the shipper makes to- 
tal 60%; deducting out of 15% expenses claimed 
by private retail markets (p. 11) 10% for actual 
labor (the balance being rent) leaves net profit 50%. 
There are certainly further expenses, but they are 
largely mere waste. 

We have now accounted for 70% (25% rent and 
45% food) of the worker's wages. The balance is 
largely spent for manufactured articles sold by 
retailers in the poorer quarters at higher prices than 
charged by the large stores in the department store 
districts. In assuming 50% profit on all of a worker 's 
purchases, such a rate seems reasonable, if one con- 
siders further the smallness of purchases (coal by the 
pail, etc.), poor quality, adulteration, and cheating 
in weights and measures. 

Merely by way of comparison with the above 



178 Capital To-Day 

figures of the New York State Commission we 
abstract from the Report of the Secretary of Agricul- 
ture of 1910 the following percentages of increase 
of prices to consumers over cost (pp. 24 and 25) : 

Cabbage 135% by the head over farm price 
Onions 260% " " peck " " 
Oranges 400% " " dozen '* " 
Coffee 150 to 3375^% over import " 

Cost 7.80 cents 

Freight 0.28 " 

Total 8.08 cents per lb., sold at 20 to 35 cents 
per lb. 
Tea 212^ to 337K% over import price 

Cost 16 cents, sold 50 to 75 cents per lb. 

The extent to which freights (themselves impreg- 
nated with profits) enter into cost of domestic 
products is estimated by the Secretary on farm 
prices as low as : 

0.9% on butter (factory price) 



1.3% ' 


' eggs 


4.5% ' 


' live poultry 


4.8% ' 


' beans 


5. % ' 


' sweet potatoes 


13-6% ' 


' apples 


14-8% ' 


' potatoes 



The Cycle of Industrial Capital 179 

COMPARISON OF TOTAL SURPLUS VALUE TO VALUE OF 

MANUFACTURING PLANT 

Unit 

I million 

dollars 

Value added in 1904 by workers and employees . . . 5,935 

Wages and Salaries in manufacturing industry 

3,187 reduced by rent and surplus value 

accumulated in sphere of circulation from 

54% to 22%, or 1,298 

Total surplus value in 12 months, 1904 4,637 

Surplus value per month 386 

RESULT 

Value of buildings in 1904 (p. 175) 2,610 

Value machinery in 1904 (p. 175.) 3489 

Total value of plant 6,099 

Surplus value for 15.8 months at 386 per month.. . 6,099 

DIVISION OF LABOR TIME BASED ON 10 HOUR DAY 

Necessary labor time 22% 2 hours 12 minutes 
Surplus " " 78% 7 " 48 " 

Another striking fact in the United States Cen- 
sus figures here presented is the relatively large 
number of salaried employees to that of the wage 
workers, their numbers being respectively 519,751 
and 5,470,321, or nearly one employee to every ten 
workers. 

Nevertheless this proportion has since become 
even more unfavorable, for according to the Census 



i8o Capital To-Day 

of 1909, that is within a term of five years, their 
numbers increased : 

Employees to 790,267 or 52% over 1904 
Workers to 6,615,046 or 21% " *' 

The percentage of employees increased two and one 
half times as much as the workers. 

This is a perfectly natural phenomenon. Produc- 
tion on an enlarged scale is accompanied by technical 
improvements increasing the mass of products 
turned out by the existing army of workers, and 
while the latter has nevertheless increased at the 
rate of 4% annually, the number of persons required 
to handle, sell, and account for the increased mass of 
products has increased at the rate of 10% annually, 
so that in 1909 the proportion of employees to workers 
was as I to 8. 

In our calculation we have made no distinction 
between workers and employees for the following 
reasons : 

The class of employees may be generally divided 
into two sections. 

One is composed of the hierarchy of factory organi- 
zation (managers, superintendents, foremen), engi- 
neers, chemists, bookkeepers and clerks. These 
would be just as necessary in any other than a 
capitalist system of production, for instance in a 
system of associated labor. Therefore while not 
directly productive through the performance of 
manual labor, these people are indirectly productive 
equally with the workers themselves. 

It is true that the salaries paid to some of the 



The Cycle of Industrial Capital i8i 

employees are enormous compared to common wages, 
and that the average remuneration for the whole 
class of employees is materially higher than for the 
working class. This is because the work of the 
salaried class is considered complicated labor, or a 
multiple of common labor, to which matter we have 
referred already in Chapter 11. 

Salaries are regulated by the market price, like 
wages, although the price fluctuations of the former, 
or the deviations from value, are greater than those 
of wages. This greater irregularity, as well as the 
high level of many salaries, is due to our manner of 
producing the higher capacities. Suppose that by 
some freak of fate we had never invented a con- 
trivance for making pins otherwise than by hand; 
evidently pins would then be expensive compared 
with other goods. This is precisely what our social 
system (which also determines the degree of general 
education we can afford to give) is doing: it manu- 
factures unskilled labor more and more, as it were, 
by machine (for the machine) and the vskilled workers 
by hand. Technicians, like hand-made commodi- 
ties, represent a greater quantum of social endeavor 
or labor time than machine-made workers. Ger- 
many, which is ahead of the United States in technical 
and educational matters, has by its technical and 
trade schools reached the transition from hand to 
machine industry in the making of skilled workers, 
and for a number of years we hear much of its edu- 
cated proletariat. The exchange- value of the 
technical profession must be declining. 

The other section of the class of employees has no 



1 82 Capital To-Day 

connection with the sphere of production and belongs 
to that of circulation. This is mainly composed 
of salesmen whose activity adds no value to the 
product. Their usefulness consists in realizing for 
the capitalists the surplus value contained in the 
commodities, on which realization the whole capitalist 
system is conditioned. Not only do they realize 
the surplus value but the labor time and salary of 
every one of them leaves a profit to his employer. 

Inasmuch as this class is an indispensable adjunct 
to the existing system and is itself exploited, it is 
included in the class of productive agents in our 
presentation of the Census figures. Under conditions 
as they are the most modest drummer and the hun- 
dred-thousand-a-year electrician Steinmetz must be 
assumed to perform social service in proportion to 
their respective remunerations. And therein lies 
the difference between them and the capitalist 
owning paper titles to income or the landlord owning 
real estate of which the ground rent swells by the 
mere birth of children to other people. These gentry 
perform no function. 

Viewing, however, the activity of salesmen from 
the standpoint of a higher social organization, it 
must be considered as social waste, and their share 
in the income of the class of employees represents a 
deduction from the 22% of the social product 
falling to the productive agents. 



The Cycle of Industrial Capital 183 

CALCULATION, BASED ON THIRTY-FOURTH ANNUAL REPORT 
(19II) OF THE BUREAU OF STATISTICS OF NEW JER- 
SEY, OF PROPORTION OF WAGES AND SALARIES TO 
SURPLUS VALUE ACCUMULATED IN THE SILK INDUS- 
TRY IN THE YEAR 1 9 10. 

Value of manufactured broad silks and rib- 
bons (p. 16) $52,572,837 

Materials: raw, oils, fuel, 
waste, packing cases, light- 
ing, etc. (p. 40) $29,115,893 

Depreciation: land and build- 
ings owned by establish- 
ments (p. 38), $4,733,819. 
Adding value of rented 
property and separating lands 
and buildings by method 
used on United States Cen- 
sus calculation, result is: 
Land, $2,039,000 
Buildings, very solid 
$4,151,000 @ 1% $41,510 
Machinery (p. 38), 
10,210,675 @ 7% $7i4>747 

756,257 

Taxes on real estate and general, 

estimated 200,000 

30,072,150 

Value added by labor $22,500,687 

Divided as follows : 

Salaries not reported; U. 

S. Census 1910, vol. 

viii., p. 771, gives for N. 

J. as of Dec. 15, 1909, 



1 84 Capital To-Day 

silk employees 1774, sala- 
ries $2,317,000. Allow- 
ing six months increase 
for average of 1910 
makes 

1,814 ^^- 
ployees $ 2,364,000 

Wages (p. 76) 21,745 workers 10,526,801 

Total 23,559 57% 12,890,801 
Surplus value 43% 9,609,886 $22,500,687 



TOTAL RATE OF EXPLOITATION 

Assuming the value per yard to be $1.00 and the 
figures of the Bureau accordingly to stand for yards 
instead of dollars, it is plain that after 30,072,150 
yards are sold and have replaced the consumed 
capital, fixed as well as liquid, the remaining 22,500,- 
687 yards are to be divided 

12,890,801 yards to the workers and salaried employees 
9,609,886 " " " manufacturers. 

But instead of each worker taking his quota of 
yards silk in natura, we can view him as then and 
there selling it to the manufacturers at the factory 
price of a yard for a dollar and with the money 
(after paying his rent) buying the necessaries of life 
at the retail price. The difference between the 
factory prices at which the working class sell their 
share in the product to the capitalist class and the 
retail prices at which they buy back the same from 
the capitalist class, allowing however for the necessary 



The Cycle of Industrial Capital 185 

circulation cost, as freight, storage, etc., is the further 
surplus value collected by the landlords and by the 
capitalists in the sphere of cir dilation ^ in addition 
to the surplus value collected by the capitalists in 
the sphere of production, as shown in the calculation 
of "Proportion of Wages and Salaries to Total 
Surplus Value" (p. 176). 



CHAPTER IX 

THE MYSTERY OF CAPITALISM 

In the preceding chapter the cycle of industrial 
capital as a whole has been depicted as starting 
on its career and completing its first turn, the same 
as any individual capital in a new sphere of enter- 
prise may be seen to do any day. The beginning 
and the completion of the turn have shown the 
motive which is expressed in the formula m — c— M. 
The money capital invested does not, however, pass 
simultaneously in its entirety through the successive 
phases of the cycle, but in due course portions of the 
capital may be found in all the different phases at 
the same time, especially with the repetition of the 
turns, in other words with reproduction. 

Of course, when a wheel is actually revolving any 
point is as much the beginning as any other, and what 
had been fixed in the formula as the beginning 
becomes a mere point of passage like all the others. 
Then we are in a position to exercise freedom of 
choice for looking upon any other point on the wheel 
as the beginning. For instance our good friends, 
the political economists, prefer to represent the pro- 
ductive process (. . . p. . . ) as the beginning of the 
story. Certainly such a view of the matter has its ad- 

i86 



The Mystery of Capitalism 187 

vantages. It throws at once into relief the fact that 
the object of the captains of industry is really the pro- 
duction of the necessaries of life for mankind, probably 
supplying them as cheaply and as plentifully as 
possible. As soon as we gain a good realization 
of this view, we comprehend readily that circula- 
tion is in our day not different from former times, it is 
always c — m — c, production for the sake of consump- 
tion. We shall also have no suspicion that the 
technical revolution in the instruments of production 
during the last two centuries has brought about a 
revolution in the division of the classes by con- 
centrating the ownership of the new instruments of 
production in the hands of the new capitalist class 
and divorcing the workers from their antiquated 
tools, thus subordinating them as the wage-working 
class in the new capitalist order of society. We 
shall further be saved the racking of our brains in 
trying to understand that c — m — c, a relation of 
social equality, has been superseded by m — c — M, 
production for the sake of profit, a relation of social 
inequality. 

That the laudable zeal of the capitalists to provide 
mankind with the necessaries of life, and even with 
luxuries, carries with it its own recompense by en- 
riching them, it would be of course impracticable 
to deny. The national wealth is in their custody, 
without check and without bond, a condition said 
to have been described by the late lamented President 
Baer of the Reading Co., leader of the anthracite 
trust and Morgan satellite, in a letter to a Wilkes- 
barre minister referring to "the Christian men to 



1 88 Capital To-Day 

whom God in His infinite wisdom has given the 
control of the property interests of the country." 
On the other side the wage-workers, as we already 
had occasion to notice, are practically penniless. 
Political economy deals only with wealth, not with 
poverty; the representatives of the latter, therefore, 
do not count, a fact wittily reflected by George 
Bernard Shaw in a letter to a New York gentleman 
who had requested an appointment: *'I shall not 
be in London at that time. In fact nobody stays 
in London during the summer, except a few million 
cockneys." 

Now, what is the source of the wealth? Any 
child knows enough to answer that it is an accumula- 
tion of profits. But just how do the profits originate ? 
On this point the political economists disagree, and 
their disagreements should impress us with their 
originality and independence of thinking. On the 
other hand they thereby expose themselves to the 
reproach that their methods are philosophic, not 
scientific, for no science offers opposing theories, 
differences among scientists existing only during 
the stage of hypothesis. Time was when political 
economy bid fair to develop into a real science; that 
was in the days of the classics Petty, Smith, and 
Ricardo, whose vision was of course limited by the 
empirical conditions of their time and by the lack of 
the theory of understanding, given to the world 
later by Dietzgen and which we have already out- 
lined. But historical development atrophied the 
nascent science. The awakened realization by the 
workers that they constituted a distinct class, having 



The Mystery of Capitalism 189 

common interests opposed to those of the capitaHst 
class, and the class struggle to which this realization 
gave rise, paralyzed a science having for its theme 
the laws governing the economic relations of the 
warring classes. The frank investigator of the 
youthful days of capitalist society degenerated into 
the latter-day professor, who no longer searches for 
truth, but for lawyer's arguments in conducting a 
defense. 

So instead of unity through scientific methods 
which would be fatal to the defense, we find among 
the political economists conflicting philosophic views 
as to the best way of conducting the defense, each 
professor adding some immaterial frill of his own 
which in his estimation grows to the importance of 
the saving thought. Essentially they have only 
two ways of accounting for profit: one is that it 
originates in the productive process in a manner too 
mysterious and contradictory to permit of a clear-cut 
analysis, while the other attributes it entirely to the 
sphere of circulation, as a phenomenon accompanying 
the sale of the product. 

Let us first dispose of the latter explanation. 
Here the postulate is that the value of the product 
cannot be larger than the value of the capital which 
had gone into and has been consumed in the produc- 
tive process, all the elements of production (including 
of course labor) having been paid for at their full 
value and the addition of the value of these elements 
constituting the value of the new product. In 
other words, the capitalists sell to each other their 
products (raw, partly manufactured, and accessory 



I90 Capital To-Day 

materials, buildings, machinery, and articles of 
individual consumption) above their value by adding 
a profit. 

When Robert and Bertram, the merry vagabonds, 
met again after a long interval and in the exuberance 
of their feelings embraced each other, each improved 
the occasion by deftly abstracting the other's hand- 
kerchief. It is impossible to see how these worthies, 
by cheating each other, increased the value of the 
stock of handkerchiefs one particle. If only one 
had been successful, the result for them as a class 
would have been the same — what one gained the 
other lost. As a class they could not grow richer 
except at the expense of those outside their class. 

But, it is maintained, the value of a commodity is 
less in the hands of the producers, than in those of 
the consumers (in which are included the capitalists 
in their capacity as productive consumers). The 
fact of the matter is that the producer does not look 
on his commodity as a use- value to himself; it is to 
be realized as such only by the consumer, productive 
or individual, who acquires its use-value by paying 
for its exchange- value. He does not pay twice for 
the commodity, first for its exchange- value and then 
something extra for its use-value. 

This doctrine aims to steer clear of a discussion 
of the part played by labor in the creation of value 
and therefore of surplus value or profit. The inten- 
tion is good ; it is better this discussion were avoided. 
But the road to perdition is paved with good inten- 
tions. What if the workers should seize this doctrine 
and say : 



The Mystery of Capitalism 191 

Things seem to be fixed so that everyone can make a 
profit on the commodities he sells, except us who, do 
what we may, must sell our only commodity, our labor 
power, at the cost of production. We want the rules of 
the game changed so that we are the exception no longer. 
We want some of the smart men on our side to find out 
what is the proper profit of labor, and if they come to the 
conclusion that this adding a profit all around is only 
tomfoolery we will abolish the whole profit system for 
you and for us. 

Such language, we all agree, would not be elegant; 
for our own part we might add that the demands 
would not thus be stated with scientific correctness, 
but they certainly would be dangerous to our social 
system. 

Indeed, something resembling this idea, but with- 
out the formulation of any demand, privately, so to 
say, has been carried out by the English, Belgian, 
and German cooperative societies. The first men- 
tioned do five hundred and fifty million dollars* worth 
of business annually^ and these associated workers 
employ as salaried managers, etc., many a former 
employer of theirs. 

We can now turn our attention to the principal 
strain of political economists, that which leaves the 
question of profits in a mystic haze. Since Adam 
Smith there has been no progress in the science of 
which he is called the father, but his candor and 
repose have been replaced by very active wriggling 
and dodging on the part of the present-day profes- 

^ Socialism and Democracy in Europe, by S. P. Orth, Professor of 
Politics, Cornell University, p. 218. 



192 Capital To-Day 

sors, a concomitant of the changed psychology of the 
working class. It will therefore be more direct and 
useful to follow Smith's thoughts, rather than the 
gymnastics of the exponents of economics in its 
period of degeneration. 

If the capitalist cycle begins with ... p ... we 
must perforce presuppose the entrance into it of some- 
thing. What was it ? From the standpoint of the capi- 
talist (and there is no other standpoint, as we shall 
see presently) it was a certain value of capital in di- 
vers forms. One of these forms is human labor. But 
the capitalist has not bought the laborer as a slave. 
Also the laborer is not a capitalist ; he has a commodity 
to sell, but that becomes capital (the means of produc- 
ing surplus value) only in the hands of the capitalist ; 
it is not capital while owned by the laborer. He 
cannot be made to fit as a man into a system which 
expresses itself in terms of capital. What capital 
then do wages represent? Why that part of the 
circulating capital of the nation necessary to the 
keep of the laborer, exactly as of working animals. 
Smith expresses this result in Wealth of Nations^ 
book ii., chap, v., p. 279: ''Not only his laboring 
servants, but his laboring cattle, are productive 
laborers" — and again in book i., chap, vi., p. 38: 
**In the price of corn, for example, one part pays 
the rent of the landlord, another pays the wages or 
maintenance of the laborer and laboring cattle 
employed in producing it." 

This analogy of the wages of laborers and of the 
wages of cattle was as far as the empirical conditions 
of his time permitted Smith to see. In making it, 



The Mystery of Capitalism 193 

he was under no restraint by consideration of polite- 
ness or expedience; his book was not written for the 
workers, who could then neither read nor write. His 
placing the laborer and the laboring cattle on the 
same level cannot fail to attract our attention to the 
points of similarity between the economic conditions 
of the different workers, the slave, the wage-worker, 
and the animal. The slave thinks he is not paid at 
all for his labor; he has no opportunity to make a 
comparison between the meal set before him and that 
with which Jack London's ''People of the Abyss'* 
have to get along. The wage-worker thinks he is 
paid the full value of his labor. That they are all 
partly paid is concealed in one case by the relation of 
ownership and in the other by the money relation. 
The situation was really only clear to the feudal serf 
who worked a number of days on his own land, and 
a number of days on his lord's, without pay. 

In Smith's time the workers had no conception of 
their human dignity or of having any rights. It could 
not be expected of him to analyze economic issues 
which had not yet arisen. Our ideas and concepts 
are the reflection of the material conditions surround- 
ing us. A remarkable illustration of this profound 
truth is given by Marx in the case of Aristotle, the 
greatest thinker of antiquity, who started to analyze 
why commodities exchange with each other or with 
money in given proportions. Exchange, he saw, is 
conditioned on commensurability, and this on 
qualitative alikeness. Here the great man threw 
up his hands; he was unable to penetrate to a 
definition of value of which the secret is the concep- 
ts 



194 Capital To-Day 

tion of the equivalence of human labor, of human 
equality. But Greek society was based on inequal- 
ity, on slave labor ; nothing different was conceivable, 
— it was the "natural" order, just as to Smith 
production and capitalist production were synony- 
mous, his ''natural" order. 

Inquiry into the question whether the worker's 
sustenance was really one of the elements which en- 
tered the productive process ( . . . p . . . ) , or whether 
it was not rather the worker himself, whose living 
labor power, the active element, entered that process 
in a different manner from the dead means of pro- 
duction, the passive element, was reserved for a later 
time, when capitalism had accomplished the con- 
centration of the population in cities and of the 
rather isolated workers into mass employment, 
thereby awakening their consciousness of class in- 
terests. Das Kapital appeared ninety-one years 
after Wealth of Nations. 

As soon as the solution had been found that it was 
the worker's necessaries of life which entered . . . p . . . 
and in precisely the same way as the other elements 
of production, it was clear that the profit arises from 
all of them indiscriminately. They are now all 
elements of capital, and the commodity is the product 
of capital, not of labor. No longer is labor the source 
of value, but capital. Where labor has been buried, 
there now hovers a mystery. 

When particularly capable workers had developed 
into industrial capitalists, or existing mercantile 
capitalists had entered the field of production, the 
new methods employed, first, of division of labor, 



The Mystery of Capitalism 195 

subsequently of machinery, lessened the labor 
necessary for the production of commodities and 
thereby their value. But the new commanders of 
industry did not originally sell their products at 
their reduced value. The capitalistic pioneers in 
any particular industry were able to dispose easily 
of their production by selling but slightly under the 
prices of the independent workers, pocketing the 
extra profit and accumulating additional capital to 
be employed in forcing the former free workers, 
whose ground was cut from under their feet, into the 
new class of industrial wage- workers. The extension 
of the capitalist mode of production in time, however, 
sharpened the competition between the capitalists 
and brought down the pioneer's profit rates to a 
general or average level in any given industry. A 
new capital seeking investment would then only be 
interested in ascertaining in which trade or industry 
the returns promised to be highest for the amount of 
capital to be invested. Also capital in a less re- 
munerative sphere might be transferred to a more 
profitable one, — a transfer effected without much 
difficulty by that part of the industrial capital which 
governs the process of circulation, the mercantile 
capital. This competition for the best spheres of in- 
vestment, withholding capital from those yielding in- 
ferior returns and exerting pressure on those yielding 
higher returns, results in the establishment of a general 
or average rate of profit for all industrial capital 
whether functioning in production or in circulation. 
The profit to be derived from every hundred of 
money in a definite period, say annually, is the 



196 Capital To-Day 

controlling social fact which supersedes all individual 
differences entering into the determination of com- 
modity prices, such as rates of surplus value, lengths 
of turn-over, etc. Not only those elements of any 
capital which enter into the constituency of prices, 
such as material, wages, and wear and tear of fixed 
capital, but also those elements of capital which do 
not so enter, as the unconsumed part of the fixed 
capital, are entitled to the average profit rate. Under 
this rate the profit accruing to each individual capital 
investment is added to the cost of production by 
the rule of percentage. It is in practical effect the 
same as if the capitalist class constituted a joint- 
stock company which divides the total surplus 
value extracted from the working class according to 
the number of shares each capitalist holds, and not 
according to the quantity of surplus value extracted 
by particular industries. The loose organization 
of this stock company permits the making of extra 
profits by individual capitalists through superior abil- 
ity or unscrupulousness or luck, but the total surplus 
value appropriated by the company equals the total 
dividend, and if some capitalists collect more than 
the average rate of profit, which forms the working 
basis of the system, others must be collecting less 
than the average rate. 

Now let us see the results of capitalistic price 
fixing. In the following little table it is assumed 
that the rate of surplus value is 100% (that is in a 
10 hour day, 5 hours reproduce the wages and 5 hours 
are unpaid labor) and that the rate of profit added 
to the cost price of the commodity is 20% : 



The Mystery of Capitalism 197 



Consumed 
capital 


Wages 


Surplus 
value 


Value of 
articles 


Capitalist's 
prices 


95 
80 

65 


5 
20 

35 


5 
20 

35 


105 
120 

135 


120 
120 
120 



Some of these articles may enter a further process of 
manufacture as materials and at their false price 
falsify from the start the value of the new product. 
It is impossible in capitalist society that products be 
exchanged at their value ; to so exchange them would 
result in very different profit rates, a condition 
inimical to the capitalist bottom principle of free 
competition. 

The fact that competition has been largely elimi- 
nated during the last quarter of a century, especially 
in the sphere of production, resulting in an increase 
of economic power of the capitalists, appears like 
a denial of competition as a life principle of capitalism. 
But the logical result of competition is the survival 
of a small number of the strongest who may continue 
the warfare between themselves or combine. The 
process shows the revolutionary nature of capitalism, 
which is condemned to undermine its own foundation. 
The degree of concentration in trusts, a matter to 
which we shall devote more detailed attention further 
on, the same as the status of money, the supreme 
Thing which rules the whole fabric of capitalist soci- 
ety, indicate how far the evolution of capitalism has 



198 Capital To-Day 

progressed. We can foresee the eventual concentra- 
tion of the still competitive industries ; we can also 
conceive of the power of indirect taxation of the 
people, now exercised by the individual trusts, being 
held in check by a controlling money trust; we may 
even go so far as to conceive of an industrial feudal- 
ism which could dispense with money along with 
competition. But such a logical outcome of evolu- 
tion would breed a degree of social consciousness 
which would be deadly to class privilege. History 
has a way of knocking off the ripe fruit before it 
falls to the ground. 

Meanwhile we may console ourselves with under- 
standing that the capitalists must somehow leave 
enough to the workers to enable them to reproduce 
labor power and perpetuate the capitalist system, 
much as they did yesterday and as they do to-day. 
No monopoly raises the price of any article, which is 
not a necessity, beyond the level at which the con- 
sumers can afford to buy it. But if monopolies 
raise the prices of necessaries of life, they are thereby 
raising the cost of production of labor power, result- 
ing in necessarily higher wages, unless the workers 
submit to a lowering of their standard of life. 

Within these limits monopolies are able to fix prices 
without regard to cost of production and uninfluenced 
by the average profit rate. The extra profit thus 
gained by them is a deduction from the dividend that 
remains available for the other capitalists out of the 
total surplus value collected by the whole class. 

We have said that value was buried and only a 
n;iystery remained. 



The Mystery of Capitalism 199 

What is seen is that the more labor is ground out of 
the workers, the less the cost of the product. How 
then can labor be the source of value ? Is not saving 
in the labor cost the same as buying your material 
cheap? What do we care how much of the labor of 
others is embodied in a product? It is the cost of 
production that counts. The capitalist is not in- 
terested in measuring his profits by the worker's 
share, but by the capital invested. The fact is that 
capital is the controlling social factor; capital, not 
labor, regulates prices. The equation: equal labor 
for equal labor, is forgotten ; it reads now : for equal 
capital equal profit. 

Labor has become wages. 

Value has become cost of production. 

Surplus product, formerly reserve stock, has 
become profit. 

Thus more rubbish has been piled up where labor 
was buried ; its remembrance has grown dim and the 
mystery is greater than ever. 

At the beginning of this chapter we had occasion 
to remark that parts of any industrial capital may 
be found simultaneously in the several phases of 
the industrial cycle. On the other hand an individu- 
ally owned industrial capital does not necessarily 
describe the whole cycle. Some concerns may be 
so situated, owing to the size of their capital, the 
nature of their products, the terms or usances in 
vogue in their particular industry, as to be able to 
sell their products at the full market price to the 
productive or individual consumers, generally the 
former. But others, differently situated, sell their 



200 Capital To-Day 

products to merchants at less than the full prices, 
abandoning to them the completion of the circula- 
tion and the realization of the balance of the surplus 
value contained in the products. The merchants' 
capital, therefore, forms part of the industrial 
capital, but in a specialized form. It enables the 
productive capital to devote itself entirely to increas- 
ing the production, while its own efficiency in the 
sphere of circulation shortens the duration of circu- 
lation, to that extent increasing the profit rate of 
industrial capital as a whole. 

What price concession must the productive capi- 
talists make to the merchants ? 

The latter expect a return on their investment 
equal to that of the producers ; if they were denied 
full participation in the average profit rate, they 
would turn manufacturers themselves. Conse- 
quently the price reduction to the mercantile capi- 
talists must be such as to enable them to realize 
from their annual sales the average income accruing 
to a productive capital of equal size. 

Now, the annual sales engineered by two mer- 
chants' capitals of equal size may vary enormously 
from each other in amount of money. The dis- 
crepancy is due to the difference in the length of 
turn-over required by the two different classes of 
commodities. The cause of the difference may be 
found in the nature of the commodities or in the 
existence of banking assistance in one case and its 
absence in the other. It is evident, if the principle 
of equal profit for equal capital is to live, that the 
percentage of profit to be added to the cost price of 



The Mystery of Capitalism 201 

a commodity turning twenty times a year cannot be 
the same as that of one turning only twice a year, 
otherwise the annual profit rate for the latter would 
be ten times as much as for the former. 

The different percentages added to the cost of the 
respective commodities, as exemplified by these two 
merchants' capitals, further falsifies value. 

Of course, the gentleman of many turns and 
corresponding profit addition has no idea of any 
connection of his method with the question of labor 
and value. When he advertises: "Our motto is 
quick sales and small profits," he may possibly 
sometimes believe it himself. The. shallowest views 
of the political economists are generally derived from 
the merchants' conception. To the latter the mystery 
of profit is complete, the duration of the period of 
circulation appearing to them as an important ele- 
ment of value, whereas the productive capitalists, 
more directly in contact with labor, have at least a 
glimmer of the truth, as has ever been evident from 
their unalterable resistance to any reduction of the 
hours of labor. 

In the wholesale market the great staples are dealt 
in on the basis of well-defined quality gradings, so 
cheap an article as cotton, for instance, being ranged 
in about a dozen quality grades. The market 
prices of the leading staples, as grain, cotton, metals, 
and others, are fixed daily by the respective Ex- 
changes. For other commodities regular price 
currents are published, and many manufactured 
articles are sold according to price lists. The market 
prices of products not standardized are generally 



202 Capital To-Day 

estimated closely by the expert merchants handling 
them. 

All this is quite different in the retail trade. It is 
impossible for the consumer to possess the knowledge 
to judge of the values of the variety of things he 
has to buy, and this circumstance exposes him to 
being taken advantage of by retail merchants. The 
reader will remember some figures given in the previ- 
ous chapter regarding the landing cost of tea and 
coffee in New York and the retail prices in the same 
city. But what are we to say when so competent a 
writer on economic topics as William Hard^ asserts 
that the identical tea is sold by the same firm in the 
same city of New York in its different branch stores at 
thirty-five and seventy cents? General stores, heading 
their newspaper advertisements by the quotation of a 
standardized or proprietary article at or even below 
cost, while the remainder of the quoted prices is of 
not standardized articles, may possibly be selling the 
latter at the proper prices. The consumer is not 
able to judge, but the use of a decoy by such stores 
creates a moral presumption against them. That 
a small shopkeeper, in trying to eke out a living, 
sizes you up to decide whether to charge you a cer- 
tain price or twice as much for a watch or a potted 
plant, may be a necessity for him, although it plays 
havoc with value. However, the writer had the 
personal proof of advantage-taking by a large 
millionaire concern when they asked for a certain 
wooden article $3.50 plain and $9 with carving. 
The difference he knew to be at wholesale only $9 

^ "Better Business," Everybody's Magazine, May, 1914. 



The Mystery of Capitalism 203 

per dozen, i.e., 75 cents apiece. Of cheating by 
adulteration and false weights and measures it is 
not necessary to more than remind the reader in this 
connection. 

The barons of the middle ages and other freeboot- 
ers of the time waylaid the merchants and robbed 
or blackmailed them in a brutal but straight- 
forward manner. Present-day methods are more 
refined, but more underhanded. Neither the former 
violence nor the present-day cheating form legitimate 
parts of the respective social systems, feudalism 
and capitalism, but are nevertheless economic factors 
significant of the respective general character of 
each system. 

Altogether the mercantile capitalists contribute 
their honest share of additional material to pile on 
the rubbish heap which conceals value and which 
assumes the proportion of a mound. It appears 
hardly credible that anything could lie buried under- 
neath. 

We have so far in this chapter considered the two 
divisions of capital, the productive and the mer- 
cantile, whose representatives are the functioning 
agents, personally or by proxy, in the cycle of re- 
production and who participate equally in the 
average profit rate. In addition to these two divi- 
sions, and originally grown out of their technical need 
in relation to the movements of money, there has 
arisen, with the fuller development of the credit sys- 
tem, a new division of capital, the loanable capital 
represented by dealers in money. 

In the capitalist system of society any sum of 



204 Capital To-Day 

money whatever is per se a title to the labor of others, 
which title however can only be realized by that sum 
being put into the hands df productive or mercan- 
tile capitalists for use as capital in the purchase of 
means of production or commodities respectively. 

The scattered sums of money, consisting of the 
individual hoards of the industrial capitalists (see 
Chap. III., div. c), of the money of money capitalists, 
the savings and revenue funds of all classes, are 
collected by these dealers in money, the banks, and 
placed by them at the disposal of the entire class of 
industrial capitalists. 

The bankers, like the merchants, are commodity 
dealers, but the commodities dealt in by the two kinds 
of capitalists differ much from each other. The 
commodity handled by the former is money capital. 
Its use- value consists in the production of profit. 
While the consumption of the use-value of the 
merchant's commodity destroys its exchange- value, 
the consumption of money capital increases its 
exchange-value. This mysterious nature of money 
capital brings it about that this commodity is not 
exchanged for an equivalent, but is only parted 
with for a time, coming back to its owner in a state of 
perfect preservation with an added increment. In 
other words the transfer takes the form of the loan 
and the use-value of the money to the borrower is 
expressed by the rate of interest. 

The formula of interest-bearing capital (money or 
its equivalent) is m — M. Money becomes more 
money. A given quantity is not only itself, but also 
another quantity. lOO is also io6. Value begets 



The Mystery of Capitalism 205 

additional value. Kant's Ding an sich becomes worse 
confounded ; it changes its specific weight. When the 
productive or individual consumer gives money for 
commodities, both buyer and seller receive equiva- 
lents; only given values are involved. But in the 
transfer of money capital as a commodity the same 
object has two values. In the formula of industrial 
capital, m — c — M, there is at least expressed an 
economic relation : production, the buying and selling 
of commodities. All we see in m — M is a juridical 
transaction without economic connection. Does 
capital bear interest, the same as a pear tree bears 
pears ? But the pear tree runs a chemical factory in 
which inorganic matter is changed to organic. Yet 
the political economists teach us that it is a natural 
power of money to bear interest. Indeed, they 
base on this argument their justification of profits, 
for if capitalists were not allowed to make profits, 
could they not convert their assets into money and 
invest it at interest ? Suppose they all, or a considera- 
ble number of them, tried it — what would become of 
their capital value and what of the rate of interest ? 

In the cycle of industrial capital we see nothing of 
interest-bearing capital. The cycle does not care 
whether any part of the capital is borrowed or not. 
The movement of the loan capital is from the out- 
side, directed towards and merged in the current of 
the cycle as an indistinguishable part of the industrial 
capital. 

If the memory of the true source of value were not 
all but extinguished by this time, we should suspect 
that the interest-bearing capital went in on one side 



2o6 Capital To-Day 

of the witch's kitchen, called the productive process, 
and came out on the other side with an increased 
value, just as some other things have a way of doing 
in the same place, and that the result of the witchery 
is divided between the functioning capitalist and the 
lender. 

That loan capital should appear as a distinct 
source of value to the mind of an industrial capitalist 
working with borrowed money is plain enough. 
This conception, however, spreads to the competing 
capitalist who works only with his own money. He 
is not going to deceive himself; he ought to show as 
good results in the way of profit rate as the borrow- 
ing competitor, plus the interest ; he is rigorous with 
himself, not given to easy self -pacification. Says 
he to the bookkeeper: "Before making the final 
net profit entry, charge off x% of the capital account 
to interest account!" Then a light descends on 
him, his mind becomes as clear as mud, and he adds 
proudly: "This business has paid the workers the 
value of their labor ; it has paid capital what is due to 
it as capital, and all the rest I have created with my 
own head and feet." The bookkeeper murmurs to 
himself: "Wonder how much he would pay to a 
principal clerk or how much salary he would com- 
mand as a principal clerk." He was no doubt 
thinking of a passage in Wealth of Nations where 
Adam Smith, referring to a "principal clerk," says: 
"The owner of the capital, though he is thus dis- 
charged of almost all labor, still expects that his 
profits should bear a regular proportion to his 
capital." 



The Mystery of Capitalism 207 

Pile up the rubbish heap ! 

If it is a natural quaHty of money to bring an 
income, so, vice versa, any regular income may be 
regarded as the fruit of a certain capital. An 
annual income of $600, supposing the prevailing 
interest rate to be 6%, represents a capital of $10,000, 
and lo presto ! this capital springs forth into existence 
where a minute before there was a vacuum, just as 
the world was created out of nothing under the 
hand of God. In beholding the performance of this 
**stunt, " whether called capitalization or necro- 
mancy, the brain refuses any longer to think of the 
mystery of value. 

Adam Smith's capitalist who expects the usual 
rate of profit, perhaps minus his manager's salary, 
although absolved from "almost all labor," is a 
rather limping figure in that author's "natural'* 
system. But this system is very badly disfigured 
by another personage — the landlord, of whom Smith 
says his "rent costs him neither labor or care.'* 
However, Smith was a philosopher and did not 
mind if a "natural" system had a hole or two. The 
political economists have told us ever since that labor, 
capital, and the earth are the three creators of value. 
How the division of the value between labor and 
capital is effected has been referred to very cursorily 
in these pages. Now as to the earth! Surely, if 
the earth is a creator of value, it ought to get its 
share of it, perhaps in the shape of plenty of manure 
or other betterments. Now there come along a 
number of persons who claim that they are represen- 
tatives of the earth and demand its share in the form 



2o8 Capital To-Day 

of rent. If anybody tries to hold out that the human 
race was put on this planet, etc., they interrupt 
impatiently saying that they do not know anything 
about planets ; that the earth is real estate and always 
was ; anyhow the law says it is and that in fact they 
need not rent out at all, but could tell the population 
to betake themselves off that ** planet." And as 
the population knows that the law is always the 
expression of morality, they submit and pay rent. 
The ground rent pumped out by the landowners 
from the capitalists is part of what the latter have 
pumped out of the workers. If the capitalist is his 
own landlord that does not change the situation 
for other people. 

The earth as one of the sources of value: — this 
completes the Mystery, and the truth seems buried 
beyond the possibility of resurrection. 

Darwin in his Formation oj Vegetable Mold de- 
scribes how an abandoned city was eventually 
buried by the action of earthworms, so that the 
plowman of future centuries never suspected what 
was buried under his land. Is there in this not some 
analogy to the subject-matter of this chapter? 

But there arose a man of such power of analysis 
and consecutive thinking, as the human race had 
perhaps not produced in the thousands of years since 
Aristotle. Even as the archaeologists did in Egypt 
and Assyria, so he dug into the overlying accumula- 
tions which historic necessity had forced men to 
pile up, uncomprehended by themselves, and thus 
he laid bare the methods of social evolution. The 
name of this great man was Karl Marx. 



CHAPTER X 

FICTITIOUS CAPITAL 

a. Transformation of profit-hearing into interest- 
bearing capital. 

Before the second quarter of the nineteenth 
century, business corporations did not exist, ex- 
cept for a number of banks (nearly all of them un- 
important so far as this country is concerned) , some 
gas companies, and perhaps a few others. Until then 
commercial and industrial enterprises were con- 
ducted by individual, functioning capitalists with 
their own money, at the most with some additional 
borrowed money entrusted to them by those who 
knew them personally. 

Near the turn of the century the dynamic force of 

steam had come to be applied in manufacturing, 

and the resulting increase in production and widening 

of markets called for improved means of overland 

transportation of raw and accessory materials, as well 

as of finished products. Thus was suggested the 

use of the same force for moving wagons on iron rails. 

But the sum of money required for this great change 

in the means of transportation was so stupendous 

that appeal had to be made to all available funds. 
14 209 



210 Capital To-Day 

In this way the railroad company became the real 
pioneer of the great modern corporations. 

It is difficult to realize that it is only seventy- 
five years since New York and Philadelphia, or 
sixty-five years since New York and Boston were con- 
nected by rail. And in this short space of time what 
has been the growth of the corporate form of business ? 

We shall find the answer to this question in the 
United States Census from which the following 
figures are taken (in million dollars) : 

The total value of manufactured products in 1909^ 
was 20,672, whereof was produced by corporations 
16,341, so that the latter represented about 80% of 
the total. 

It is true that many of these corporations repre- 
sent merely a continuation of the ownership by 
former partnerships and even individuals under a 
changed legal organization;, nevertheless the above 
figures afford an approximate picture of the change 
which has taken place, as we shall be able to recognize 
presently. 

By the class of fair sized and large establishments, 
those whose annual production is valued at over one 
million dollars, a class which constituted only 1.1% 
of the total number of establishments, there was 
produced in 1909 not less than 43.8% of the total 
product. "* As this same class had produced in 1904 
only 38% of the total value of manufactures, it is fair 
to assume that it is at present contributing about 
one half of the total product value. 

* Thirteenth Census of the United States, vol. viii., p. 135. 
^Ibid., p. 180. 



Fictitious Capital 211 

Even so this class includes a large number of 
firms or "close" corporations, having an annual 
production of as little as one million dollars, who by 
their presence in the above 1.1%, small as this 
percentage of all concerns is, tend to obscure in the 
Census the greatness of the real corporations. 

Were data available to separate the latter from the 
firms and close corporations, the result would still 
be inadequate to offer a complete picture of the 
importance of the corporations in the national econ- 
omy. Manufacturing represents only one branch of 
productive capital and it is the one in which the corpo- 
ration is least preponderating. In mineral produc- 
tion, including coal, petroleum, natural gas, iron, 
gold, copper, etc., the great corporations predominate 
overwhelmingly, and its importance appears in the 
sum of $2,446,000,000 given as its value at the 
places of production in 1913.^ 

Certain other branches of industry are almost 
entirely the domain of corporations, as the telephone, 
the telegraph, gas, electric light and power plants, 
expresses, and last but not least, the railroads. 
These are productive industries as much as any 
other. A railroad conveying materials from the 
place of production to the place of their transforma- 
tion is a productive agent like the railroad or human 
carrier that conveys them from one building of a 
plant to another; the same holds good in the rail- 
roads' conveying the finished products from the 
place of production to the place where their use- 
value can be realized. The freight traffic is pro- 

^ Statistical Abstract of the United States, 19 14, p. 665. 



212 Capital To-Day 

ductive consumption. The passenger transportation 
is the production of a commodity for instantaneous 
individual consumption. To classify the operation 
of railroads as commerce, as is done in official utter- 
ances and elsewhere, is false and confusing. The 
designation "Interstate Commerce Commission" 
for the board of control of transportation is a 
misnomer. The price of both kinds of commodities 
produced by the railroads is measured by the money 
received for them. In 1913 the receipts of the steam 
railroads were $3,057,000,000 (not including, of 
course, revenues from investments, rents, etc.).^ 

Apace with the formation of the industrial corpora- 
tions and called forth by it, went the concentration 
and incorporation of the loanable capital as national, 
state, and savings banks, and trust, mortgage, and 
life insurance companies. With the exception of the 
savings banks and mortgage companies, which lend, 
the former partly, the latter entirely, on real estate 
mortgages, some fair sized banks in cities which 
continue as commercial banks, and small country 
banks which do a neighborhood business, all the 
others, comprising by far the largest national, state, 
trust, and life insurance banks, are welded into a 
''system" which is closely identified with the indus- 
trial capital. The fact that the central control of 
the system rests with a few firms and individuals 
should not confuse us as to the general corporate 
character of the banking capital. 

In contrast with the now practically incorporated 
and united industrial and banking capital, the mer- 

^ Report of Interstate Commerce Commission, 19 13, p. 46. 



Fictitious Capital 213 

chants* capital presents the aspect of an uneven 
development. It has been eliminated largely as 
agent of circulation between the industrial capitalists, 
but is tending toward the corporation form in the 
retail trade. The once proud merchant class which 
had engineered the transformation from small scale 
production to capitalist production, and had long 
domineered over the petty individual productive 
capitalists, has been eliminated entirely as interme- 
diary between the great corporations, who now keep 
themselves the portion of the surplus labor formerly 
ceded by them to the wholesale merchants. The 
latter now only maintain themselves in the com- 
petitive industries, notable among which are the tex- 
tile industry and the derivations thereof. In the retail 
trade the merchants are being crowded on the one 
hand by industrial corporations, producing articles of 
individual consumption, which these sell direct to 
the ultimate consumer, and on the other hand by 
corporations handling all sorts of products of the 
competitive industries. Of the former class we 
might mention the producers of tobacco, ice, shoes, 
candy, wagons, automobiles, a single company 
operating as many as a hundred restaurants, etc. 
To the latter class belong corporations operating 
department stores in a number of cities ; corporations 
operating several department stores under different 
names in the same city ; corporations operating chain 
stores for groceries; one corporation (owned by the 
insiders of the Tobacco Trust) conducting a chain of 
nearly one hundred drug stores. Another corpora- 
tion conducting nearly seven hundred five and ten 



214 Capital To-Day 

cent stores throughout the country has a turn-over 
as large as either the New Haven or the Erie rail- 
roads, according to the Wall Street Journal. For 
general rural retail trade a number of mail-order 
corporations are gaining ground very rapidly; one 
among them approaching a turn-over equalling 
that of the Erie and the New Haven railroads 
combined. 

International trade, just as international banking, 
continues in the hands of firms. 

Such have been the astounding changes wrought 
in three quarters of a century. In England, the 
classic land of capitalism, the limitation of the 
liability of stockholders to the amount of their 
stock was not enacted into law until 1855. If 
capitalist society, during the first two centuries 
after its sprouting, moved forward at a rate never 
before seen, its gait was greatly accelerated by the 
mechanical inventions and the use of steam power, 
but since the advent of the railroads and great cor- 
porations it is traveling in seven league boots. 

What means this victory of the corporation which 
has taken place under the eyes of our old men ? 

Generally this question is discussed from the or- 
dinary subjective viewpoint of bourgeois philosophy; 
it would be too much to expect professors and 
journalists to approach the ticklish subject with an 
objective, scientific mind. Are corporations good 
or bad? Or are the smaller ones tolerable and the 
larger ones bad? What is the line of demarcation 
between the two? Are they the work of prophets 
or of evil-minded, selfish men? Should competition 



Fictitious Capital 215 

be preserved? If so, and since it has not a robust 
constitution and is visibly growing feebler, were it 
better to prescribe a diet of pap to keep it on its legs, 
or administer an alcoholic stimulus ? ^ 

Such discussions however bring us no nearer to 
an understanding of this evolution and again we 
must ask what means this victory of the corporation ? 

Foremost, and as a fundamental principle of the 
change, stands the abolition of the industrial capi- 
talist as an organ for the performance of a certain 
social function. 

The early owners of the means of production had 
naturally assumed the command of labor ; but ruling 
is no sinecure, and as long as rulers have been a 
necessity, they have always themselves fixed their 
reward. So did the functioning industrial capi- 
talists. During the period of individual industrial 
enterprise, now rapidly passing into history, cases 

' For example, a modern political economist, Professor Jevons, 
says in the concluding chapter of The State in Relation to Labor: 
"the subject [industrial competition] is one in which we need above 
all things — discrimination. Restrictions on industry are not good 
nor bad per se, but according as they are imposed wisely and with 
good intentions, or foolishly and with sinister intentions." And 
who is to decide whether particular propositions are good or bad 
and pass judgment on intentions? Professor Jevons gives this 
answer: "We must agree to differ; and though we are bound to 
argue fearlessly, it should be with the consciousness that there is 
room for wide and bona fide difference of opinion." By all means let 
us agree to differ and let us have great argumentations, fearless of 
their unstable basis, therefore mutually forbearing and always good- 
natured, like a freshmen's debating society. Such argumentations 
are taken seriously by many people and have practical advantages in 
enabling us to arrive at any desired conclusion regarding any pending 
issue. 



2i6 Capital To-Day 

like Adam Smith's employer of a "principal clerk" 
were the exception. In the present-day corporation 
all the managers are employees, salaried as highly 
skilled workers at the market rate. 

The loss of the managerial function by the indus- 
trial capitalists has been accompanied by their loss 
of all control over the use of the property. In fact 
the new condition involved a complete change in the 
conception of property. As far back as the memory 
of the capitalist runs, he understood property to 
consist of money, commodities, land, things tangible 
and absolutely in his control. Now he sees it as 
apparently no man's property, something in a way 
social, with himself in possession of nothing but a 
piece of paper giving him title to a share in the 
profits, but not to any of the capital, except to 
any residue thereof in case of bankruptcy of the 
enterprise. 

But, someone may wish to remind us, the owners 
of the paper can exercise their control by voting at the 
annual meeting of stockholders. Correct theoreti- 
cally, in practice absolutely illusory. For instance 
the Southern Pacific Co., an $800,000,000 corpora- 
tion, circularizes all its thousands of stockholders 
inviting them to the annual meeting at its office in 
Beechmont, Jefferson County, Kentucky, to elect 
directors and ratify the actions of the directors and 
executive committee. This office consists of a one- 
room shack in a back yard, serving as a storage 
place for a wheelbarrow and some other agricul- 
tural implements. The thousands, however, fail to 
appear at the appointed time in the company's office 



Fictitious Capital 217 

at Beechmont, Jefferson County, Kentucky. In fact 
nobody appears on the scene but three employees 
of the company, one no doubt to act as chairman, 
the second as secretary, and the third probably as 
the stockholders, or maybe as the sergeant-at-arms. 

Even when the stockholders of a similarly large 
corporation, the Atchison, Topeka & Santa Fe Co., 
are invited in their thousands, scattered from Maine 
to Oregon, to come to a Kansas town, where at least 
there exist accommodations for strangers, it is absurd 
to expect the stockholders to exercise their right 
either personally or by a perfectly free proxy. 

If we go from a rural place in Kentucky to the 
other extreme, the great metropolitan center of the 
country, embracing a population of six millions, we 
meet with exactly the same condition. There an 
investigation by a legislative committee of the abuses 
and corrupt practices of the life insurance companies 
resulted in their mutualization. Do the policy- 
holders living in the metropolitan district avail 
themselves of their right? Not one. The voting 
is done by a few office clerks and agents. 

It is plain that we are confronted not by a theory, 
but by a condition, no matter whether the latter is 
due to a feeling of confidence, indifference, or helpless- 
ness on the part of the stockholders. Whatever the 
cause or causes may be, the simple fact is that 
the ordinary stockholder has no more influence on 
the control of the corporation than a fly on the wheel 
of a locomotive. The condition in the corporation 
republic is the same as in some of the Latin-American 
republics: a clique gets into the saddle and is '*re- 



2i8 Capital To-Day 

elected " as long as it pleases. Down there they some- 
times have successful ''revolutions," but in this 
country since the union of the two leading financial 
groups, following their titanic struggle over the 
control of the Northern Pacific Railway Co. in 1901, 
any insurrection by outsiders against the ''system'* 
would be worse than futile for the insurrectionists. 

But why is the control of a corporation so much 
coveted by the big capitalists? Are they perhaps 
altruists obeying the urge of their hearts to dedicate 
their time and their abilities to the benefit of all the 
shareholders, equally with themselves, rather than 
have others burden themselves with this service ? 

The real fact of the matter is that the control of 
a corporation offers immense opportunities for per- 
sonal enrichment at the expense of the fellow-share- 
holders, exactly as the control of a city offers similar 
opportunities to Boss Murphy or Boss Cox at the 
expense of their fellow-citizens. They do not own 
New York or Cincinnati, they just control these 
cities. 

The opportunities to the controllers of corporations 
present themselves in a variety of ways. One of 
them consists of contracts which the men in control 
of a corporation can bring about with certain con- 
struction, land, supply, advertising, etc., com- 
panies, of which they themselves are the principal 
owners. As instances of construction frauds. 
Professor Parsons mentions^ the Union Pacific 
Railroad which paid 94 millions of dollars for work 
which cost 51 millions; 62 millions profit in the 

^ Railways, Trusts, and the People, p. 106. 



Fictitious Capital 219 

construction of the Central Pacific Railroad ; con- 
struction and other frauds in the Northern Pacific 
Railroad which made the capitalization of 600 miles 
of that line 143 millions, when only 22 millions had 
been spent. 

They can divert the most remunerative business 
of a railroad to express or fast freight lines in which 
they are much more conspicuously interested as 
stockholders than in the railroad. 

Control includes the power to direct the corpora- 
tions where they shall keep their immense cash 
funds on deposit, and how long they shall so keep 
them ; it means the power to chose the time for new 
issues of securities, which issues are bought or under- 
written by those in control at prices fixed by them- 
selves. 

Another opportunity is referred to in the report of 
the Congressional Committee appointed to inves- 
tigate the concentration of control of money and 
credit, popularly known as the Pujo Committee, as 
"the scandalous practices of officers and directors in 
speculating upon inside and advance information as 
to the action of their corporations. ' ' ^ The committee 
was polite in using the word "speculation" which 
includes in its meaning the possibility of loss. But 
these gentlemen enjoy a sure thing in putting other 
people's money into their own pockets. 

But nothing could illustrate as clearly the value of 
control, and incidentally the power of J. Pierpont 
Morgan, the head of the "System," as his purchase 
from the lesser magnate T. F. Ryan of $51,000 par 

^ Report of Committee, p. 115. 



220 Capital To-Day 

value of Equitable Life Assurance Society stock, 
yielding only $3570 a year, for approximately $3,000,- 
000. The income on the investment therefore 
yielded less than &% per annum, but gave control 
over the Society's assets of over half a billion, which 
were not its property, but trust funds. ^ Questioned 
by the Pujo Committee as to his motives for making 
an investment yielding so low a rate of interest, 
Mr. Morgan emerged from the interrogation, leav- 
ing the committee to its own conclusions. 

His testimony as to how he obtained the stock 
was as follows:^ 

Q. Did Mr. Ryan offer this stock to you? 

A. I asked him to sell it to me. 

Q. Did you tell him why you wanted it ? 

A. No. I told him I thought it was a good thing 
for me to have. 

Q. What did he say when you told him you would 
like to have it and thought you ought to have it ? 

A. He hesitated about it and finally sold it. 

It is transparent that Ryan came down as grace- 
fully as the coon when it saw Davy Crockett's gun. 

In short, the pecuniary benefits of control are 
limited only by the discretion of those exercising it. 

We thus see that all semblance of the former 
functions of the industrial capitalist, the labor of 
exploitation and the control of property, is gone. He 
has been converted into a mere owner of a title to a 
share in the profits, converted into a mere money 
capitalist. . 

^ Pujo Report, p. 83. 
2 Id., p. 137. 



Fictitious Capital 221 

We remember, however, from the preceding chapter 
that the money capitaHst receives out of the indus- 
trial profits only a part in the form of interest, the 
toll of mere inactive ownership. As the corporation 
consists of profit-making industrial capital, we must 
examine the apparent contradiction which lies in the 
fact that its owners, the stockholders, are only 
interest-drawing money capitalists. 

Let us first compare the points of similarity and 
dissimilarity between the shareholder and the lending 
capitalist. They both limit the sum which they will 
place in any particular enterprise ad libitum. The 
risk of loss for both is limited to the sum invested, 
neither being liable for the debts of the enterprise. 
They are both not concerned with the movements of 
the industrial capital, but both must presuppose 
its production of profit, if the principal is to flow back 
plus the increment. The rate of the last mentioned, 
however, is prearranged in the loan (bonds, com- 
mercial paper, corporation notes, real estate mort- 
gages, etc.) but only approximately estimated in 
shares, with a tendency to a somewhat higher rate of 
increment than is ruling at the same time for loans at 
fixed interest, especially if these are secured by pledges. 
Besides this difference, which is not qualitative or 
essential, there is the further one, of equally little 
import, that the principal returns to the money 
capitalist directly from the borrower, and to the 
shareholder indirectly by the sale of his shares. 

The latter was not always as readily effected as 
to-day. The subscriber to shares of the early cor- 
porations risked to tie himself up with the venture 



^22 Capital To-Day 

to a certain degree, although of course less so than 
he would have in an individual enterprise. His 
position was intermediary between that of industrial 
and that of money capitalist and his revenue there- 
fore included not only interest, but some profit of 
enterprise. But with the spread of corporations 
and with the institution of daily markets for shares 
or stock exchanges, the return of the principal to 
the shareholder at any time he desired became 
assured. It was then that all the conditions were 
given for the completion of the transformation of 
the industrial into money capitalists. 

We have now arrived at the point when we can 
consider by what process the profits of the former 
were transformed into the interest of the latter, 
dividends being only another form of interest. The 
ready sale of shares presupposes the existence at all 
times of sums of money seeking investment and 
competing not only for the lending opportunities, 
but also for shares. The profit income attaching 
to the shares is reduced by the competitive bidding 
for them by the buyers until it approximates the 
ordinary rate of interest. This means that the 
buyers are willing to pay more for the share than 
the amount of industrial capital for which it was 
originally the certificate. 

How is this possible ? We have already recorded 
the fact that every sum of money is a title to revenue. 
Inversely any regular revenue is regarded as interest 
on an imaginary capital, and if not too precarious, 
like wages depending on the health of the workers, 
and if transferable, may be transferred against the 



Fictitious Capital 223 

payment of a sum which would yield an equal 
revenue at interest. This creation of imaginary 
or fictitious capital out of a revenue is called ' ' capi- 
talization." 

Now, our first investor has paid one hundred 
dollars into an industrial venture. This money 
begins to function as industrial capital by the pur- 
chase of means of production and continues through 
the metamorphoses of the industrial cycle. 

The investor's money has been changed into 
industrial capital for all time. He received for it a 
share certificate which represents a title to profit. 
It does not represent a title to any capital. The 
capital exists only in the corporation. By the 
investment he has not doubled the existence of 
the value of the one hundred dollars, first as in- 
dustrial capital vested in the corporation and second 
as share capital vested in himself. 

When the shareholder sells his share, the latter 
enters a circulation of its own, as interest-bearing 
capital, quite independently of the circulation of the 
industrial capital itself to which it is referred for 
revenue. The circulation of the share therefore 
requires an additional and entirely different capital. 
The price of the share has no relation to the capital 
value of the corporation. It is determined, aside 
from speculative considerations, by the income 
attaching to the share and by the prevailing rate of 
interest. So far as the price depends on the last- 
mentioned entirely extraneous circumstance, it is 
clear that a share yielding $10 annually is worth 
$200, if the prevailing rate of interest is 5%, no matter 



224 Capital To-Day 

whether a nominal value of $25 or $100 is printed on 
it. This explains how a continued industrial depres- 
sion, in due course resulting in an accumulation of 
idle funds, may cause a rise in the prices of interest- 
bearing securities, if there exist at the time no other 
special reasons for apprehensiveness. Thus a London 
correspondent in the Annalist of February 9, 19 14, 
reports: "Bankers, . . . overloaded with funds 
. . . by . . . reduced productive activity, are falling 
over one another to buy the fewer bills " — "the effect 
of the scramble . . . has been the boom which we 
have seen on the Stock Exchange." 

Here we have an illustration of the fact that the 
share is not representative of a quotient of the capital 
value of the corporation, but that its price is merely 
the capitalization of a revenue. In other words a 
capital value arises in the share which is entirely 
fictitious and dissociated from the value of the 
functioning industrial capital. The latter is con- 
demned to "reduced productive activity," hence 
yielding reduced profits. Instead of reflecting the 
adverse circumstances into which the industrial 
capital has fallen, we see the shares enjoying an 
independent "boom" due to an outside factor, 
namely, the state of the money market, the ruling 
rate of interest expressing itself in the case of stocks 
and bonds by fluctuations in their prices. 

As such periods of redundance in the money 
market, or the reverse condition, may seem a puzzling 
contradiction to the indestructibility of money of 
account, referred to in a previous chapter, which 
indestructibility implies a very high degree of 



Fictitious Capital 225 

regularity in the supply of money of account, it will 
not be amiss to examine the question in connection 
with the creation of fictitious capital and its circula- 
tion at fluctuating prices. 

Of course, one explanation presents itself at once 
in assuming a general disposition at certain times on 
the part of the money capitalists to hoard their 
funds, that is to leave them idle in the banks, rather 
than run the risk of employing them, under then 
existing doubtful conditions, as capital. This ex- 
planation is valid for a time when distrust sets in 
and when usually the banks themselves, from their 
better opportunity of seeing the shadows of coming 
events, are the first to start the hoarding. But this 
explanation fails in the case of a money stringency 
arising in a time of prosperity and optimism, when 
the willingness to employ money as money capital is 
general. 

Inasmuch as money of account is indestructible, 
and as we are not venturing anything in assuming 
that there has been no reduction in the volume of 
current money, it is evident that the stringency 
is not due to there being at such time less money in 
existence than in a period of redundancy. It is, 
then, not a matter of variation in the volume of all 
existing money, but only in that part of it available 
at any given time as loan capital. And in our 
inquiry we must distinguish between the two func- 
tions of loan capital — whether it is to circulate as 
industrial or as fictitious capital. 

In highly developed capitalist countries all money 
converges in the banks, the social agents for convert- 
15 



226 Capital To-Day 

ing money into money capital. Aside from the 
capital and surplus of the banks themselves, what is 
usually termed '* banking capital" consists of de- 
posits, overwhelmingly the money of industrial 
capitalists. 

We have seen in Chapter III., sec. c, how several 
factors in the industrial cycle of the single concern 
bring about the temporary inactivity of the money 
form of its capital. For the concern itself the money 
is in this state merely potential capital which is 
converted into active capital for another concern 
by the bank. 

This money represents for its owner the various 
elements of value of sold commodities, viz. : 

(i) The money advanced as constant liquid 
capital and variable capital and needed again in due 
time for reproduction. It must remain industrial 
capital and is not available for conversion into ficti- 
tious capital. 

(2) Wear and tear of fixed capital. The amor- 
tization fund being built up by one set of productive 
capitalists is continually lent by the banks to the 
other set which is ready to renovate its plant. This 
money likewise must remain industrial, and cannot 
become fictitious capital. 

(3) Surplus value. 

Part of this money provides for the personal 
consumption of the capitalist and is not directly 
available either as industrial or fictitious capital. 
Indirectly, through other capitalists, it reenters the 
industrial cycle. 

Another part must be applied as an addition to the 



Fictitious Capital 227 

capital, reproduction on an enlarged scale being a life 
principle of competitive capitalism. This part con- 
sequently must remain in the industrial sphere and 
cannot be diverted into the realm of fictitious capital. 

The residue of the surplus value may be converted 
into fictitious capital. 

The bank's own money is available for, and usually 
invested in, fictitious capital. 

Finally idle money of money capitalists, interests 
and rents, minus the living expenses of the money 
capitalists and landlords, may be converted into 
fictitious capital. 

It follows that the sum of money available for the 
creation of additional fictitious capital is limited by 
certain economic laws. If these laws are violated 
by excessive issues of fictitious capital, the conse- 
quence is an insufficient supply of industrial capital, 
a rising rate of interest, reacting adversely on 
security prices, the whole ending in a crisis, precisely 
as happened in 1907. 

The reverse condition, one in which the industrial 
capitalists are favored by loans to the detriment of 
makers of fictitious capital, is unimaginable. It 
would be as much as saying that the industrial and 
banking capitalizers were willing to forego the hand- 
some profits of capitalization. 

We must, of course, not overlook the fact that 
the requirement of money as industrial capital is 
itself a variable quantity, depending on the cycles 
of prosperity and depression, inseparable from 
competitive capitalism, as well as on other causes, 
such as great natural catastrophes and wars. 



228 Capital To-Day 

To be quite clear concerning the sums available 
at different times for conversion into either industrial 
or fictitious capital, which sums fluctuate greatly 
notwithstanding the high degree of regularity in the 
volume of money, we must possess a correct under- 
standing of the situation of the banks. Although, 
as said above, all money converges in the banks, 
yet collectively they generally have no money, 
other than their reserves, consisting of current 
money of the realm. The banks are on the one 
hand debtors to two groups, their stockholders and 
their depositors. On the other hand they are credi- 
tors of two other groups, legal persons who borrowed, 
and legal documents which we call revenue titles. 
Between the two groups on one side and the two 
groups on the other side the banks continually make 
transfers forward and backward on their books. 
Nothing changes but the atoms of each group, and 
all that is of economic importance is that the trans- 
fers be made in the proper proportion from and to 
each separate group. This schematic grouping 
does not conflict with the fact that individuals 
figure simultaneously as creditors and debtors of the 
banks. Borrowers of large sums leave smaller 
sums on deposit, which presupposes large depositors 
who are not borrowing. 

For the further elucidation of the question as to the 
source and limitation of the supply of money avail- 
able for fictitious capital, we may here return profit- 
ably to the purveyor of war supplies whom we left 
in Chapter VI. in the possession of inactive money. 
Whether this will serve in reproduction or not, 



Fictitious Capital 229 

depends on the renewal of the warring government's 
purchases. These again depend — we are only con- 
sidering the economic aspect of things — on the 
government's ability to find the necessary money. 
When its treasure has been spent, its only remaining 
ordinary resource consists of its income from taxes, 
customs duties, and profits from state industries, 
such as railroads, telegraphs, mines, postal system, 
etc. But the tax receipts are greatly reduced owing 
to industrial depression; likewise the profits from 
state industries which are working now mainly for 
the army and not for sale of its products by the 
capitaHst state to the public, while the receipts from 
customs duties may be entirely cut off by a blockade. 
To repair the deficit in income relative to expendi- 
tures by raising the tax rates is impossible; they 
would have to be raised to such an extent as to 
amount to a confiscation of profits and thus to the 
frustration of the purpose of capitalist production. 

If the government cannot satisfy its financial needs 
from its present income, it may sell future income 
for present money, — in other words burden the fu- 
ture generations, who have had no say in the matter, 
with interest on a new loan. Where is the money 
for this loan to come from ? We already understand 
that the money available for conversion into fictitious 
capital is a limited quantum. The banks may sub- 
scribe the entire loan, perhaps partly in calling other 
loans. But there can be no indefinite number of 
repetitions of loans, not only because of the normal 
limitation of the money supply applicable to this 
purpose, but because the curtailment in the produc- 



230 Capital To-Day 

tion of new value reduces the new surplus value to 
the bare needs of the capitalists for their personal 
consumption. The surplus value may besides be 
entirely offset for the capitalists by their losses from 
the temporary decline of the market prices of all 
their stagnant stocks of commodities which are not 
strict necessaries. It is true that the capitalists 
producing such commodities as projectiles, explo- 
sives, and other war supplies are very busy and 
garnering large profits which they might lend to the 
government in order to push a good thing along. 
But the consumption by the government is rapid 
and continuous and the whole value of the com- 
modities consumed is more than the surplus value 
incorporated in them, of which latter, as we have 
seen, even only a part is available for fictitious 
capital. 

After the money available for fictitious capital 
has been transferred by the spendthrift governments 
from the bank accounts of the lenders to the bank 
accounts of the manufacturers of war supplies, the 
governments are at the end of their tether so far as 
borrowing is concerned. If the combatants, like 
desperate gamblers who hope that their last piece 
of money will win for them, should have recourse to 
printing press money, it would lead to the breakdown 
of the capitalist form of society. Let no one be 
confused by the fact that as recently as fifty years 
ago there occurred in the United States the repudia- 
tion of the paper money of one section of the country 
and the great depreciation of that of the other 
section, without leaving behind permanent ill effects. 



Fictitious Capital 231 

That happened at the beginning of the world's great 
industrial forward movement, at a time when the 
world's production of coal and iron in a year was 
not more than what it now turns out in a few days. 
Money of account scarcely existed. What the 
social organism of that time could stand, the highly 
sensitive organism of to-day, especially so in its 
financial mechanism, could not stand. We must 
also not forget that the financial disturbance would 
accumulate enormously in force by affecting sev- 
eral leading countries, instead of only a semi- 
colonial country, as the United States was in the 
early sixties. 

The sum of fictitious capital is largely in excess of 
the sum of money of account and of all money in 
existence. According to the Commissioner of Internal 
Revenue, the capitalization only of business corpora- 
tions amounts in the United States to almost exactly 
one hundred billions of dollars, of which about two 
thirds represent capital stock and about one third 
bonds. The sum of the fictitious capital is thus five 
times as large as the sum of all money in existence, 
real and imaginary. How is it possible that any 
excess of fictitious capital over all money can exist? 
How was the excess paid for ? 

We can readily understand that the identical 
money can circulate fictitious capital values in any 
number of multiples of its own value, in the same 
manner as a dollar can circulate on one day a number 
of commodities, each of its own value, by passing 
from hand to hand. Besides the amount of money 
of account necessary for the circulation of the vast 



232 Capital To-Day 

amount of fictitious capital is reduced to moderate 
proportions by the stock exchange clearing house 
which balances sales and purchases in a manner 
similar to that in which the banks' clearing house 
balances checks. 

It might seem for a moment, as if the identical 
money could also create multiples of its value. For 
instance, a number of citizens start a bank, which uses 
the paid-in capital to promote an industrial enterprise. 
Each hundred dollars cash has created a hundred 
dollar bank share and a ditto industrial one, a total 
of two hundred dollars fictitious capital. But looking 
closer, we find that the bank, as a profit-making 
institution in itself, is a nonentity; its existence is 
futile, if it can do nothing but hand over to its 
stockholders what these might have encashed direct. 

The identical sum of money may serve in a chain 
of an indefinite number of loans; it is only the 
original owner who is able to retain the interest, and 
the last borrower who pays it. There is only one 
capital value and only this is entitled to interest. 

Supposing, however, that the hundred dollars 
had circulated as follows: A lends them to B, B 
buys commodities from C, C lends the money to D. 
In this case the identical money yields interest to C 
as well as to A. This is because in C's hand the 
money no longer represents A's capital, but his own, 
namely the money form of the value of the commodity 
he sold. 

We now see that the consecutiveness of two loans 
or of the creation of two fictitious capitals with the 
identical money is an absurdity, and that there must 



Fictitious Capital 233 

take place at least one sale of commodities of equal 
amount between the two loans or stock creations. 
The bearing of this law on our inquiry will appear 
further on. 

Since to reinvest as interest-bearing capital the 
proceeds of the sale of fictitious capital would be 
futile, according to the law referred to, the interesting 
and very relevant question arises whether, in using 
the money to buy commodities, the issuer chooses 
means of production or luxuries for his personal 
consumption, or if he buys of both, what proportion 
of each. We shall meet with some enlightenment 
on this point also later in this chapter. 

If we now understand how a given sum of money 
can circulate a vastly greater sum of fictitious 
capital, but cannot create such capital in excess of 
itself, we are still confronted with the problem of the 
origin of the mass of fictitious capital in existence. 

In the first place a great part of the same has been 
originally paid for at much lower than its present 
market prices. One important group, the railroad 
shares, were bought at bankruptcy prices, that 
is for very little, as will be told more in detail in 
Chapter XII. 

Other shares were originally issued under par, 
especially when the share capital represented nothing 
but water; or they were issued not for money at all, 
but against the transfer to the corporation of the 
establishments and good will of the former owners, 
mostly good will. 

Still other shares were issued gratis to the pro- 
moters of corporations, as reward for their services, 



234 Capital To-Day 

and to stockholders as extra dividends. The latter 
originated the bulk of the capitalization of many 
corporations. 

Having thus accounted for a great, if not the 
greatest, part of the floating fictitious capital, and 
found that little money, or other value, has been 
given for it, there still remains for us to analyze 
the balance of the capitalization supposedly paid 
for in full by money. 

It is here that the law of alternate loans and sales, 
above explained, is to be applied. The fictitious 
capital which has actually been paid for in money 
has been so paid by the identical money serving 
repeatedly as new capital, representing each time 
new commodities produced and sold. This fictitious 
capital was paid for nominally and directly by a 
comparatively small amount of money, in reality 
and indirectly by long-continued productive labor. 
The workers paid for it. 

h. Capitalization applied at the source. 

After the transformation of profit-bearing capital 
to interest-bearing capital through the agency of 
competition for the shares in circulation has reached 
a certain development, the process is applied at the 
source and fictitious interest-bearing capital is 
created at once in incorporating already existing 
industrial concerns or in starting new corporations, 
having a more or less definite prospect of earning 
the average rate of profit. The latter form of capi- 
talization represents thus a further step forward 



Fictitious Capital 235 

in the socialization of capital and the elimination 
of its owners as social functionaries. 

For instance a firm employing a capital of 
$1,000,000 and usually making a profit of $400,000 
yearly is gaining 40%; by the way not an unusual 
rate according to the testimony of John Moody, 
which is hardly needed, so well is the fact known. 
If the prevailing rate of interest on share investments 
is 7%, the aforementioned firm may be capitalized 
at nearly $6,000,000. The immediate profit of 
$5,000,000 is divided between the resigning industrial 
capitalist, just being metamorphosed into a money 
capitalist, and the underwriting bankers. It does 
not take much cogitation to see that the new capital 
originated by the profit of incorporation is fictitious, 
for the value of the establishment has not been in- 
creased one cent by the change. But a little reflec- 
tion will show that the shares representing the one 
million are equally fictitious. This money was paid 
for an industrial establishment to produce a revenue ; 
if then this revenue is used as the basis for sending 
forth into circulation another capital, in addition to 
the one already existing and functioning, the second 
one is fictitious. 

If instead of the hypothetical, but normal, example 
of a sextuple capitalization given above, an incor- 
poration offers prospects of more than the average 
profit, owing to monopolization of an industry, pa- 
tent rights, tariff protection, etc., the capitalization 
may be relatively greater. The following is a 
beautiful example gleaned from a report of Herbert 
Knox Smith, Commissioner of Corporations, sub- 



236 Capital To- Day 

mitted in September, 191 1, on the tobacco industry 
(American Tobacco Co.) '• 

For example, one of the constituent businesses was 
valued in 1885, under competition, at $250,000. Five 
years later, at the organization of the old American 
Tobacco Company, it formed the basis for the issue of 
$7,500,000 of stock. By 1908, due to various readjust- 
ments, the securities based on this business had increased 
to $22,000,000. Meantime, cash dividends and interest 
thereon had amounted to $16,900,000. Thus, the total 
par value of these securities plus the dividends and 
interest paid up to 1908, amounted to nearly $39,000,000, 
or 156 times the value of this particular business in 1885. 

The business above referred to was that of the 
firm of W. Duke, Son & Co., Richmond, Va. Lest it 
might be thought that this is an isolated case of 
enormous capitalization, we present two other ex- 
amples in the flotation, not of minor concerns 
happening to enjoy some special advantages, but of 
manufacturing corporations among the largest in 
the country. 

In the formation of the Sugar Trust, Havemeyer's 
Brooklyn refinery, which had been capitalized at 
$500,000 and taxed at less, was transferred and 
$15,000,000 stock issued against it.^ 

When the Steel Trust was organized, the constitu- 
ent companies were already overcapitalized, never- 
theless: ' 

One of the constituent companies, the Carnegie Com- 
pany, received $492,000,000 of Trust securities, though 

^ See The Truth about the Trusts, b}'- John Moody, pp. 62-67. 



Fictitious Capital 237 

the value of the principal properties involved was only 
about $34,000,000 as shown by the books of the com- 
pany for the same year, 1900.^ 

The deception regarding the fictitious nature of 
industrial "securities" (just as nice a word as "real 
estate") is facilitated by their relation to real, 
functioning capital. The illusory, purely arithmeti- 
cal nature of the value of these pieces of paper appears 
plainer in another, but quite analogous, kind of 
paper capital. We mean the national debts, which 
have already been mentioned in another connection. 
The money borrowed by the governments was not 
used as capital (with unimportant exceptions) , never 
was intended to be so used, although its use as 
capital was the only way of preserving its value, but 
instead has pretty generally been wasted in powder 
and smoke. Nothing is left but the debts. So here 
we have an illustration how not only nil, but less 
than nil, — a minus, a debt, — is capital in the eyes of 
the owners of the papers. What the states are doing, 
is to sell titles to taxes, derived from surplus value, 
similar to the titles to interest, also derived from 
surplus value. All these titles are supposed to stay 
valid till the end of days. We are drawn to a com- 
parison of these papers, sold by the promoters, with 
the papers sold by Tetzel : pardons for sins. Such a 
comparison shows up the characteristic difference 
between the mental attitude of the beginning of the 
sixteenth century and our own time. Tetzel' s 
papers were a title to everlasting happiness in 

* Railways, Trusts, and the People, Frank Parsons, p. 112. 



238 Capital To-Day 

heaven, the modern capitalist class rather invests 
in papers guaranteeing everlasting happiness on 
earth. 

The difference between bonds and shares is only 
this: the former are a mortgage on land, past labor 
and living labor; the latter are a mortgage on living 
labor only. It is therefore logical that shares, in 
consideration of their lesser security, should com- 
mand on the money market a higher rate of interest 
than bonds, the difference being a premium of risk. 

The mass of fictitious capital is growing continu- 
ously, partly from new incorporations or extension of 
existing corporations and partly from stock dividends 
distributed in order to change the accumulated mass 
of undivided profits into share capital or to capitalize 
the increasing inflow of profits. The expedient of 
stock dividends is used to make the rate of profit 
seem smaller to the uninitiated. Chap. VIL, sec. 
a, contains an instance of the distribution of a stock 
dividend of 1900% at one fell swoop. These extra 
distributions are comprised in what the elegant 
and imaginative language of Wall Street calls ** cut- 
ting a melon." 

To give an idea at what rate fictitious capital is 
being piled on to the previously existing load we 
quote from testimony by Charles A. Conant before 
the Interstate Commerce Commission : 

In the United States there was issued in 1908, 
$1,423,000,000; in the year 1912, $2,253,000,000. 

In Great Britain capitalization of new companies 
carried the amount from approximately $460,000,000 
in 1904 to about $1,050,000,000 in 1910. 



Fictitious Capital 239 

Annual new issues listed on the Paris Stock Ex- 
change were (in million francs) : 



1905 


3>886 


1906 


5,076 


1907 


2,847 


1908 


3480 


1909 


4,294 


I9I0 


5>6i2 


I9II 


4,696 


I9I2 


5>04i 


Dts were (in 1 


1850 


8,500 


1900 


31,250 


1912 


42,000 



There are periods when the creation of fictitious 
capital is pursued with such zest as to outrun the 
available supply of money of account. Such a 
condition results in a tightness of the money market 
and ushers in a period of industrial depression. 
** Securities" quotations drop, which according to 
the newspapers is "great destruction of wealth." 

In reality the price movements of securities leave 
the wealth of a country entirely unaffected. The 
transactions in these papers represent the sale and 
purchase of titles to income which have nothing to do 
with the functioning capital. What is wealth? A 
quantity of use- values. What is the use- value of 
rather stiff sheets of paper imprinted all over? 
We wait for an answer. The $250,000 necklaces 

* Bureau of Foreign and Domestic Commerce, 



240 Capital To-Day 

which are bought by capitalist magnates and of 
which Mr. Howard, the New York jeweler, wrote 
so entertainingly in a series of magazine articles, 
may be wealth, but wealth which has for us only 
a symptomatic, not an economic interest. Such a 
necklace may remain a family possession for a 
thousand years; it represents only past exploita- 
tion and as a mere personal ornament will never be 
the means for its owner to appropriate another iota 
of surplus value. The only element of wealth which 
is of interest in economics is capital, the thing which 
perpetuates capitalism. 

Paper capital, however, is totally fictitious. We 
know very well that no amount of capitalization can 
add to the total of the surplus value handed over 
by the working class to the capitalist class. If the 
creation of fictitious capital, then, makes no difference 
in the division of the product between the two classes, 
why do we devote so much attention to an analysis 
of fictitious capital ? 

The evolution of our social system has progressed 
so far as to open the eyes of thinking men to an 
impending radical change in our social system. 
They see the impressive phenomena of the progres- 
sive organization of whole industries on a national 
basis; the capitalists deprived of their function 
which has passed to the workers; mere ownership 
on one side, possession on the other; growing inter- 
ference in industrial matters by the government, 
national and municipal. All these developments 
point to the resumption of the control of the indus- 
tries by the workers; not as individuals, as in pre- 



Fictitious Capital 241 

capitalist times, but as associates, and to the ending 
of the existence of classes in the history of mankind. 
Already men on both sides, more preoccupied with 
the problems of to-morrow than with the facts of 
to-day, are hotly debating the question of purchase 
or confiscation by the workers, as if it were a terribly 
momentous question. Is it? 

What impresses such men are the figures of 
capitalization. Where will you get the money to 
pay for the steam and electric railroads capitalized in 
191 1 at $24,067,000,000?^ If this were really their 
value, they would represent say one seventh of the 
national wealth adding up in 191 2 to $187,000,000,- 
000. ^ This is preposterous on the face of it. 

The real fact is that the shareholders are merely 
the titular owners of the railroads. This ownership 
was or still is in many corporations as much a fiction 
of law, as the shares are a fiction of value. In 
reality the shareholders of such corporations do not 
own a brick or a nail of the railroads. Richard T. 
Ely says ^: 

It is well understood that in some businesses, and 
especially in the case of railroads, the only real investment 
is that which is covered by the bonds. . . . This is 
admitted by those interested in the business. 

It is more than admitted by James J. Hill, certainly 
a competent witness, who may be believed when 
he stated without reserve for newspaper publication 

^ Statistical Abstract of the United States, 1912, pp. 313 and 330. 
"^Statistical Abstract of the United States, 19 14, p. 628. 
3 Monopolies and Trusts, p. 140. 
16 



242 Capital To-Day 

that many corporations are even bonded beyond the 
value of their properties (no doubt inckiding their 
land) . 

Professor Ely wrote the above in 1900. In the 
following year the Steel Trust was organized by the 
issue of papers for a billion and a half, of which about 
a third in bonds was given as purchase price to the 
owners of the plants. These bonds were largely 
in excess of the value of the purchased mills, 
mines, etc., thus preem.pting future accumulation by 
improvements and extensions to a certain extent 
for the sellers, the principal one among whom was 
Andrew Carnegie. The shares sold to the public, 
amounting to many hundreds of millions of dollars, 
represented absolutely no value; their purchasers 
became the nominal owners of the industrial capital, 
but in reality they were speculators in the possibility 
of a surplus beyond the interest on the largely ficti- 
tious debt. This speculation has been successful, as 
the trust was able not only to pay dividends, but to 
accumulate value against the outstanding shares, as 
told in detail in the next chapter. Some railroads have 
of late years fattened their properties in the same 
way. Prospectuses of bond issues are apt to contain 
the assurance that millions have been expended for 
acquisitions of property and bettermSits, paid for 
out of income, although properly chargeable to capital 
account. This new real industrial capital has the 
same origin as the oldest capital — surplus value. 

In the early and crude days of the corporation, 
the money of the investor was actually converted 
into industrial capital by the purchase of means of 



Fictitious Capital 243 

production. This state of affairs exists no longer. 
Issues of shares are either sales of titles to profit 
being made or expected, the proceeds of such sales 
going into the pockets of the few who turn their 
business into corporations, including the dealers 
in issues, the magnates of credit who promote or 
underwrite the capitalization; or they are a gratis 
distribution to the shareholders of a corporation 
pro rata of their holdings, done for the purpose of 
avoiding startling rates of dividends which would 
in cases reach fifty times the prevailing rate of 
interest. The old way of allowing a $100 share to 
rise to a price of $5000 was clumsy, the new way is 
much sleeker. 

The reader will also remember from our analysis 
of money of account that it is not value itself, but 
only a title to value, which title is transferred to the 
owners of land or of fictitious capital in the purchase 
of their specialties. Those gentlemen then realize 
the titles by the consumption of products. Now 
suppose that the curtain falls on the capitalist period 
of history on a certain day at twelve o'clock by the 
town clock, as some naive persons imagine will 
happen. The buyers of land and of "securities" 
are on the pn^per spot to demand compensation for 
their value. Have they not paid out their good 
money for those things? Might they not have had 
''a good time" with that money, instead of having 
denied themselves? Did they not buy those privi- 
leges under the protection of the law for their own 
and their descendants' enjoyment forevermore? 

All very true. But on the other hand have not 



244 Capital To-Day 

the landowners and the makers of fictitious capital 
received from society value, the products of labor, 
in satisfaction of the money of account transferred 
to them by the purchasers of the rights? And now 
these latter claim value on the same score from 
society? Why should society deliver up twice? 
Somebody has evidently been cheated, but not those 
chevaliers d' Industrie, the land shark and the fictionist. 
They sold a bogus title to value which did not exist 
and with the proceeds had their "good time." 

But what have the innocent buyers bought? 
They thought they had bought the right to exact 
from the human race rent for permission to stay on the 
land and profit for permission to work, Alas! for 
the transiency of class rule. It would have been 
better to have had a good time than to invest in ' 'real 
estate" and '\securities." 

Now, if any capitalists are to be bought out, it 
must first be made clear just what are the objects 
of purchase and sale. Certainly these capitalists' 
personal possessions, as houses, yachts, country 
villas, jewelry, automobiles, etc., are not involved. 
The means of production are the only things of 
social importance and the only ones which would be 
the subject of discussion. 

The most important means of production is the 
land. The North American continent has been con- 
verted into real estate for the most part during the 
last one himdred years. In the United States this 
was partly done by the Homestead Act, but largely 
also by land grants to corporations, and innumerable 
acts of corruption as set forth in court records, 



Fictitious Capital 245 

reports of congressional and other investigation 
committees, and other authentic sources quoted in 
Gustavus Myers's History of Great American For- 
tunes, a painstaking compilation of facts. But neither 
the manner of acquisition of the land, nor its con- 
tinually rising price ($32.49 per acre in 19 10 against 
$19.81 in 1900),' including in congested cities an 
extra addition to the rent for access to more air, 
need detain us. The simple fact to stand on is that 
the earth is not the result of labor, the only substance 
and measure of value. Therefore land has no value. 

Next in importance as means of production is 
fixed capital, consisting in the manufacturing and 
extractive industries of buildings and machinery 
and in the transportation industry of buildings and 
other constructions, rolling stock, docks, vessels, 
etc. This fixed capital is subject to an annual 
decrease in value by a certain percentage through 
wear and tear. This decrease had reappeared in 
the value of the products and, by their sale, had 
assumed the money form for the owners of the fixed 
capital. 

Finally the capitalists own the liquid capital, 
consisting of raw and partly manufactured materials, 
accessory materials, commodities in circulation, and 
part of the gold and silver money. Of course, they 
also own part of the paper money and practically all 
of the money of account, but the illusory nature of 
this element of wealth has already been sufficiently 
discussed in these pages. 

* Advance Statement of Census Director Durand, September 7, 
1911. 



246 Capital To-Day 

We can now eliminate from consideration the fol- 
lowing items: 

(i) All personal possessions, former commodities 
dropped out of circulation and become mere use- 
values in course of consumption ; 

(2) The land, which has no value but only the price 
of usurpation and monopoly by a minority, and by 
an astonishingly small minority, in the centers, where 
the price of land is highest, as in the commercial, 
banking, and manufacturing quarters in the cities, 
the mineral bearing land, and in the great railroad 
and shipping centers; 

(3) All mere papers, such as stocks, bonds, real 
estate mortgages, etc., which form practically all of 
what are colloquially called 'investments" and are 
fictitious values ; 

(4) All money having no value, such as paper 
currency and money of account, the latter existing 
merely in bookkeeping. 

There remain, then, as real, concrete capital value 
in the hands of the capitalists, as outcome of surplus 
labor preserved by them, only the following items : 

(i) The fixed capital, actively functioning in the 
cycle of reproduction ; 

(2) The liquid capital, equally so functioning, 
barring fictitious money. 

Of what importance as values are these two con- 
stituents of industrial capital? 

The answer to this question is already given in our 
elaboration of the United States Census in Chapter 
VIII., so far as the fixed capital in the manufacturing 
industry is concerned. It is there shown that the 



Fictitious Capital 247 

value of this capital is reproduced by the workers 
and surrendered by them to the capitaHsts in surplus 
value every fifteen and eight tenths months. 

As to the liquid capital no figures are available. 
It is, however, a matter of common observation that 
every wide-spread or general strike in any industry 
soon results in an exhaustion of the supplies. Thus 
the great coal strike in England forced the shut-down 
of factories after a few weeks' duration. From coal 
to silks may be a far cry. Yet every silk manu- 
facturer will confirm that the memorable strike in 
New Jersey in 191 3 caused in a couple of months a 
"sold out" condition for all varieties of current sale 
and that the old guardians of the shelves, inventoried 
for some years at great discount, moved at un- 
expected prices. On the whole it is fair to assume 
that the liquid capital represents on the average a 
few months' labor, even with the inclusion of the 
average supply of agricultural products which are 
only reproduced once a year. 

That the value of the total real capital should be 
so small, if compared to the actual labor performed 
by the multitude of human ants, may surprise many. 
The reason is that they have not realized the in- 
significance of the actual and real addition to capital 
as compared to the enormous consumption that is 
continually going on. 

Take only the consumption of automobiles. Frank 
E. Dawson, statistician of the Automobile Club of 
America, states in the Club Journal that the industry 
employs in the United States directly and indirectly 
600,000 men; that out of the estimated 15,000,000 



248 Capital To-Day 

families the income of 13,200,000 families is under 
$1200. These, he says, are not interested in the 
purchase of a car. We should think that many- 
families above the $1200 line are in the same position. 
Mr. Dawson further says that there are 240,000 fami- 
lies above the $5000 income line, and that there were 
in use at the close of 1913, 1,260,000 automobiles. 
To understand this, one must know that single capi- 
talists own a dozen and more pleasure cars. Here 
we have one article entering into the consumption 
of a comparatively small number of people, but 
representing a very large industry. 

So it is this ownership of past labor of an average 
of perhaps a year's time which is the title to present 
labor and which is to continue as such title for all 
eternity. No thanks are due to the capitalists for 
having saved a year's labor, instead of consuming it, 
as they had a right to do, for thus they preserved the 
goose which lays them golden eggs. 

On the other hand we are now able to see in its 
true proportions the question, which seemed so 
momentous, of compensation or confiscation. Why, 
while the controversy might be going on, the hands of 
the clock move around, another year is past, and the 
workers have once more reproduced the capital. 

The solution of the question is not for economics. 
Considering that capitalist society is the result of a 
historical process, the matter of compensation of 
the class that was its beneficiary by the class which 
suffered during its continuance will depend on the 
moral view which the majority will take of the 
question, and perhaps as much on expediency. 



Fictitious Capital 249 

For those to whom, from Hfe-long habit of think- 
ing, the mere idea of confiscation is abhorrent and 
who consider the shares of a corporation as the cor- 
poration, let us quote from an opinion in the United 
States Supreme Court by Mr. Justice Brewer, than 
whom no more respected man ever sat on the Supreme 
Court bench, in which he said^ that a railroad 
expresses its 

willingness to do the work of the state, aware that the 
state in the discharge of its public duties is not guided 
solely by a question of profit. It may rightly determine 
that the particular service is of such importance to the 
public that it may be conducted at a pecuniary loss, 
having in view a larger general interest. . . . While we 
have said again and again that one volunteering to do 
such services cannot be compelled to expose his property 
to confiscation, that he cannot be compelled to submit 
its use to such rates as do not pay the expenses of the 
work, and therefore create a constantly increasing debt 
which ultimately works its appropriation, still is there 
not force in the suggestion that, as the state may do 
the work without profit, if he voluntarily undertakes to 
act for the state he must submit to a like determination 
as to the paramount interests of the public? 

This means that the railroads may be compelled 
under our present constitution and laws to operate 
at cost, even to the extent of defaulting on the 
interest on their bonds. What good would it do the 
holders of the latter to proceed to foreclosure and 
become themselves the owners? The roads would 
still be operated at cost for the benefit of the railroad 

^ 183 United States, 93, 94. 



250 Capital To-Day 

workers and the general public. Their character 
as capital has been taken from them; they remain 
mere means of production for the benefit of the 
people. The same principle holds good for other 
corporations engaged in interstate trade, and nearly- 
all the large corporations belong to this class. 



CHAPTER XI 

THE CONCENTRATION OF INDUSTRIAL CAPITAL 

In pre-capitalist times the object of production 
was to satisfy the wants of the workers by the 
exchange of their products with each other. The 
result of such surplus labor as some of the workers 
performed — surplus because in excess of the ordinary 
needs of men in that period — provided for them a 
fund which permitted them to indulge in more than 
the average comforts or which served them as a 
reserve against the vicissitudes of life. The surplus 
product remained in private possession and was not 
an economic factor. 

The purpose of capitalist production is the reaping 
of profit. Profit was the end which the bourgeoisie 
had in view in its demand that every sphere of 
production should be open to the free movement 
of capital. Competition was to regulate prices and 
profits. And, indeed, competition became the whip 
that urged the human race to the fastest gait of 
which it had until then been capable along the road 
of progress. 

Free competition forced every capitalist to try to 

attain the highest degree of productiveness of the 

labor he commanded and thus to reduce the cost of 

251 



252 Capital To-Day 

his product to the lowest possible minimum. This 
was accomplished in the sequence of simple co- 
operation, division of labor, mechanical inventions, 
the application of steam power and of the scientific 
discoveries, and the introduction of machinery. 
Every step forward in the technical development 
meant an increased outlay for plant and materials. 
This process shut out the smaller or less successful 
capitalists. Only those who had succeeded in the 
accumulation of the profits necessary for production 
on an enlarged scale could remain in the race. 

Therefore capitalist production, in contrast with 
its predecessor, is essentially a process of accumula- 
tion and concentration. This process operated 
slowly during the period of individual enterprise, 
when any increase in the scale of production, owing 
to its technical requirements, had to wait for a 
certain minimum accumulation of profits. 

But this limitation was removed by the appearance 
of the industrial corporation, an organization of 
capital which is independent of the individual 
fortune. It appeals to the general money market 
and collects the scattered hoards, therein resembling 
the banks, the difference being only that for its 
owners, the money is converted by the industrial 
corporations into fictitious capital, whereas the 
banking capital remains loanable capital. Instead 
of awaiting the necessary accumulation of profits 
for its expansion, an existing concern need only 
convert itself into a corporation and increase its 
money capital by the issue of fictitious capital, or if 
already a corporation, increase its capitalization. 



Concentration of Industrial Capital 253 

For new enterprises of every kind the limitation 
imposed formerly by the extent of the private fortune 
has disappeared ever since the builders of the first 
railroads accomplished their purpose by having 
recourse to the united capital of the capitalist class 
of the world. The whole social money capital is 
held in readiness to be converted into industrial 
capital. The lack of money no longer stands in the 
way of technical improvements on the largest scale, 
such as the foundation of Gary, or the Pennsylvania 
or New York Central railroad stations in New York, 
improvements which called for outlays of fifty to 
one hundred million dollars each ; or of the consolida- 
tion of related industries, like steel manufacture 
with the mining of ore and coal, with the production 
of pig iron and coke, and with transportation by 
vessels and railroads ; or of the annexation of compet- 
ing concerns by the purchase of a controlling number 
of their shares, financed with money obtained from 
the sale of fictitious capital, as has been the common 
practice in railroad consolidations. Of the latter 
Professor Parsons gives the following example ^ : 

"The Pennsylvania R.R. is supposed to be peculiarly 
free from inflated capitalization. It claimed January 
I, 1905, $193,000,000 as the cost of road and equipment 
Sindfull value of real estate, while the capitalization was 
then $418,000,000. The difference of $225,000,000 was 
issued to purchase securities of other corporations, mostly 
of railroads, for example a large amount of the stock of 
the Reading Co., which, in its turn, holds $197,000,000 
securities of other companies: 87 million dollars Phila- 

^ Railways, Trusts, and the People, p. 102. 



254 Capital To-Day 

delphia & Reading Coal & Iron Co., no million dollars 
of some 54 railroads. Among the latter is the Central of 
New Jersey which owns 130,000,000 of securities of still 
other companies." 

Professor Parsons adds : 

If anybody could take a year off for the purpose, he 
might find out how much duplication, triplication, 
quadruplication, etc., there is hidden under the serene 
surface of the Pennsylvania R. R. capitalization. 

The access which the corporation has to the 
general money market through the sale of fictitious 
capital frees it from the financial handicap of the 
individual concern, and enables it to confine any 
consideration of enlargement of plant, technical 
improvement, or annexation of related industries 
exclusively to the question of advisability on the 
score of a satisfactory increase in the corporation's 
profit rate. The industrial corporation is thus 
enabled to attain a technical superiority over the 
individual enterprises and maintain this advantage 
at least for a time, during which extra profits may 
be garnered and a further lead in the competitive 
struggle gained. The corporation so situated can 
employ the world's best scientific, technical, and 
managerial talent for which salaries of $100,000 and 
over are not uncommon. This assures permanently 
the able conduct of the large corporate concern, 
when the fate of an individual concern depends on 
the capacity of whoever by the accident of inheritance 
succeeds to the management. 



Concentration of Industrial Capital 255 

It is nowadays generally only the very large 
establishment which is in a financial and technical 
position to handle big things in the way of patents 
or scientific discoveries of great economic value. 
Time was when such discoveries were the free gifts 
of the scientists to the whole class of industrial 
capitalists. Now the great industrial corporations 
have their own well equipped chemical, physical, 
and mechanical laboratories, where staffs of scientists 
and technicians are working on the problems of their 
industries. The pursuit of important inventions by 
outsiders is generally discouraged. The mere fact 
that an invention presents a great improvement is 
far from being a reason for its adoption by the big 
corporation, often the only concern in a position to 
apply the same. The corporation managers are not 
at their post to safeguard the interests of society in 
general ; they are intent only on one thing : to show 
as large profits as possible to their directors. There- 
fore it becomes a cold-blooded question with them 
whether to buy the outside patent in order to use it 
or in order to suppress its use, or whether it pays 
better to simply violate it and wear out the inventor 
by litigation ruinous to the latter. 

While industrial corporations, no less than in- 
dividual enterprises, are conducted with the single 
view to as large profits as possible, yet on the other 
hand it is not compulsory for the former to make 
any profit at all. The stagnant individual concern, 
owing to its owner's individual consumption, drifts 
into bankruptcy. Not so the corporation, which may 
go on forever selling at cost. The Southern Railway 



I 



256 Capital To-Day 

has not paid a dividend in twenty years on its 
common stock and scarcely any on its preferred, yet 
it goes on serenely. Of course, its shares have only 
a speculative value, but they may change hands 
ever so often, the functioning capital itself does not 
change hands and is quite unmindful of what those 
papers are doing. 

Any individual concern that in its annual state- 
ment made for the purpose of obtaining credit fails 
to show profit during the year is looked at askance 
and expected to explain; in case of repetition its 
rating is reduced and its credit suffers. On the other 
hand, a corporation like the Bethlehem Steel Works, 
which pays no dividends on its common and only 
sporadic ones on its preferred shares, can borrow 
millions at the ordinary market rate of interest. 
This is so because the banking capital is familiar 
with the status of the large corporations in which it is 
financially interested. 

There are also other circumstances which affect 
the borrowing credit of individual (or close corpora- 
tion) concerns, but not that of the large corporation. 
Generally the former can obtain credit on the pro- 
portion of its current liabilities to its liquid assets ; in 
exceeding this limit the lender would become a party 
interested in the fixed capital and cease to be a mere 
money capitalist. Also the existence of a mortgage, 
especially if it includes chattels, for instance the 
machinery, usually militates against an individual 
concern's credit. The big corporations, per contra, 
may be bonded for their entire fixed capital and yet 
have easy borrowing credit, their real profit-producing 



Concentration of Industrial Capital 257 

capacity being understood by the men who control 
credit and who are often themselves directors of these 
industrial corporations. 

The freedom of the corporation from the compul- 
sion to furnish a revenue to any capitalists has been 
referred to above. Even when profits have been 
made by a corporation, it may abstain from dis- 
tributing any part thereof to the stockholders and 
instead apply the profits to the economic needs of 
the concern, such as improvements of the plant, 
the overcoming of com.petition, or simply the crea- 
tion of a contingency fund, regardless of the hardship 
which the absence of the revenue may entail on 
individual stockholders. 

At the same time the few large stockholders, by 
whom every corporation is controlled, may utilize 
their advance knowledge either as to a coming 
suspension of dividends or a coming declaration of 
an extra dividend for "long" or ''short" operations 
on the stock exchange. This safe speculation is an 
additional means for the concentration of wealth. 
During the period from April i, 1901, to December 
31, 1913, the Steel Trust made net profitsof $898,000,- 
000 and paid $546,000,000 dividends. There were 
years when there were available 14.4% and 15.6% 
respectively for dividends on common shares, but 
in which years only 2% was distributed. The mar- 
ket price of common shares has fluctuated all the 
way between 8 f and 94 |. In all such cases the 
small and uninitiated stockholders sell out long 
before the fattening of the corporation reveals itself 
in increased profits and dividends. 
17 



258 Capital To-Day 

To recapitulate, corporate industrial capital, owing 
to the separation of its function from its ownership, 
has freed itself of the handicaps and limitations 
of the individual enterprise which is dependent on 
the character of its accidental owner, his ability and 
personal needs, his fortune and his credit. 

Corporate industrial capital incidentally removes 
that resistance to the tendency toward industrial 
concentration which consists of the partition of 
private fortunes. The latter now affects only stocks, 
not stock companies. 

The tendency toward industrial concentration 
has been aided by the desire of individual capitalists, 
from private considerations, to convert future profits 
into present money. This desire of the owners 
is seconded by the prospect of the promoters* profits 
accruing to the dealers in credit by such conversions 
or by consolidations of private enterprises into 
corporations. 

Testimony before the United States Industrial 
Commission indicates that in organizing the Stand- 
ard Distilling Co. one hundred and fifty dollars 
stock was given as reward to a promoter for every 
one hundred dollars cash he was able to bring in. 
The stock so issued was apart from the stock bought 
by the underwriters and from that given to the 
owners for their properties. 

Professor Parsons mentions the following as 
rewards to promoters: American Tin Plate Co., 
ten million stock (out of $46,325,000 issued) ; Ameri- 
can Steel & Wire Co., fifteen million stock. 

It has been stated that J. P. Morgan & Co. re- 



Concentration of Industrial Capital 259 

ceived forty million dollars stock for organizing the 
Steel Trust. 

Of course, these personal motives of owners and 
promoters can enter into play only once. The endur- 
ing benefit to the capitalists in the consolidation 
of their competing plants lies in the ability of the 
trusts to earn more than the average profit rate. 
Let us first take a look at some of those profits. 

We have already had occasion to refer to the rate of 
profit made by the Tobacco Trust. 

Earlier in this chapter are mentioned some of the 
profits of the Steel Trust, but not all of them. In 
addition to the dividends there mentioned, the 
corporation "has turned back into the property 
a surplus equal to sixty-six dollars a share on the 
common stock."' The reader already knows that 
the whole share capital originally represented no 
existing value: therefore the profits cannot be 
expressed in terms of percentage on industrial 
capital. 

The same condition exists in regard to the Sugar 
Trust, of which the stock was likewise all water. 
The bonds alone amounted to $10,000,000 and 
covered operating plants valued at only $7,740,000. 
In addition thereto shares were issued for $75,000,000, 
subsequently increased to $90,000,000, on which divi- 
dends of 7% per annum have been paid since 1901. 
But this is not all. The bonds have been retired 
and a surplus has been accumulated which amounted 
on December 31, 191 3, to nearly $29,000,000. 

* P. H. Carey, Editor Poor's Manual, in letter to N. Y. Times, 
November 25, 1913. 



26o Capital To-Day 

Adding the market value of the shares to the 
dividends and interest thereon, it appears that 
Havemeyer's $500,000, regarding which there are 
some details in the chapter on fictitious capital, 
have borne fruit at the rate of over 700% for every 
year since 1901. It is said that not even is this all, 
as the men controlling the trust own as individuals 
the sources of supply of the trust's Cuban raw 
material. 

The Oil Trust *'has been known to make 530% 
on its whole capital year after year, and some of its 
investments and enterprises have netted it as high 
as 800% a year, and in one case, through railroad 
rebates, over 3000% profit per year was obtained."^ 

In the government suit against the Harvester 
Trust the defense proved that the separate plants, 
before organization of the trust, earned 200% per 
annum in the years 1898 to 1902. 

The Calumet and Hecla Mining Co. distributed 
as high as 583% on the paid-in capital (in 1906), which 
rate of dividend however fell in 1912 to 350%, no 
doubt in consequence of a lower market price for 
copper^. No wonder that the stockholders, being 
thus hard put to it to make an honest living, fought 
like tigers against their striking miners, considerably 
disturbing the State of Michigan. 

There are many instances known of smaller con- 
cerns doing quite as well. 

Of the Farr Alpaca Co., Holyoke, Mass., "employ- 

* See Wealth against Commonwealth^ H. D. Lloyd, pp. 67, 99, 100. 
'Average prices: 1906, 16.60c.; 1912, 13.52c. 35th Census 
Abstr., Table 282. 



Concentration of Industrial Capital 261 

ing upwards of 3000 hands" (meaning persons, not 
1500 pairs of hands), David I. Walsh, Democratic 
candidate for Lieutenant Governor, now Governor 
of Massachusetts, said in a speech: "Its regular 
dividend ... is equal to 576% on its original cash 
capital."^ 

The Ford Motor Co., capitalized at $2,000,000, 
made a profit in its fiscal year 191 2-1 3 of $37,597,- 
312. We do not know whether the capital was 
actually paid in, at any rate we forgo figuring 
the percentage of profit. 

In the case of Waltham Watch Co. vs, Charles 
A. Keene before the Supreme Court in 191 1 it ap- 
peared that the defendant bought the plaintiff's 
products in London, shipped them to Arabia, thence 
to the United States, where he entered them free 
of duty as American manufacture and undersold the 
trust (the several watch companies act as a trust), 
although the long-distance transaction yielded Keene 
a net profit of 30% of the value of the watches. 

Many similar cases are known where American 
goods are sold much cheaper abroad than at home. 
The same policy is pursued by the trusts in Germany. 

When we come to franchise trusts we find similar 
rates of profits. 

Postmaster General John Wanamaker wrote in 
1 890 ^: ' ' An investment of $ 1 000 in 1 858 in Western 
Union stock would have received up to the present 
time stock dividends of more than $50,000 and cash 
dividends equal to $100,000." As the stock was 

^ Journal of Commerce, N. Y., October 17, 1911. 
' Argument for a Postal Telegraph. 



262 Capital To-Day 

then about par, the profits were 450% per annum 
on the real investment, not figuring interest. 

In a speech in the House of Representatives on 
December 22, 1913, Mr. Lewis, the originator of the 
parcel post, said: "In postal-telephone countries 
the local toll tariffs tend to run about one half the 
charge for a letter, while here they run with the street- 
car fare and sometimes exceed it." 

The list of examples of enormous profits could be 
easily lengthened, but it suffices to show that there 
exists in a variety of industrial spheres a higher than 
average rate of profit. How does this affect the 
competitive capitalists and the workers ? To answer 
the question we must first understand the cause of 
the high rates of profit. 

Not only Mr. Tom Lawson, the author of Frenzied 
Finance, but people whose business it should be to 
know better, accuse overcapitalization of being 
the cause of the exploitation of the many by the few. 
That the wish of being able to produce a return on 
a great overcapitaHzation, and therefore of obtaining 
as high prices as possible for the products, actuates 
the corporation managers is a matter of course, but 
the wish does not alter the law of prices. The fixed 
capital, whether of a corporation or of a firm, may 
have been written off entirely on the amortization 
account, yet that fact would not induce any capitalist 
to sell a bit cheaper than necessary. The shares of 
the Calumet Co. above mentioned or of the Fifth Ave- 
nue Bank of New York are worth forty times their 
face value. Was the former less determined in its 
fight against the strikers for profits, because a share 



Concentration of Industrial Capital 263 

of its capital was worth $1000, than if it had issued 
forty pieces of paper worth $25 each ? Does anybody 
think that the officers of the bank mentioned were 
less intent on profit, because its capital had not been 
watered? Mr. Lawson and those who think as he 
does confound cause and effect. High capitaHzation 
does not produce high profits, but the experience of a 
certain volume of profits or the anticipation thereof 
is made the basis of the capitalization. Probable 
profits are the foundation, capitaHzation is the 
superstructure. That advertised prognostications 
are often exaggerated to deceive the investing 
public does not alter the economic theory. 

If there are industrial concerns able to maintain a 
higher than the average profit rate, then it must be 
that their spheres are no longer subject to the action 
of the agency which has produced the average profit 
rate, — namely, free competition. There are two 
primary ways in which competition manifests itself: 
first, by the transfer of capital from a sphere of low 
profit rate to one of high profit rate ; secondly, by new 
capital seeking the sphere of high profit rates and 
neglecting those of low profit rates. The first 
mentioned movement of capital became increasingly 
difficult with the ever larger investment in fixed 
capital necessitated by technical progress. The 
other movement of competitive capital, that of the 
entry of new capital into the more profitable indus- 
tries, must also have met with an obstacle. The 
first thought to present itself is that the existing 
trusts are already in control of elements of monopoly. 
This is true of many trusts, but even in the sphere of 



264 Capital To-Day 

those not protected by elements of monopoly we no 
longer see new capital entering the field. The fact 
is that new competition is prevented by the concentra- 
tion of money capital, to which the next chapter will 
be devoted. 

To the extent to which competition has been 
eliminated in a sphere of production, that sphere may 
be described as being more or less monopolized. If 
any single organization within a sphere controls 
such a proportion of the total production as is in- 
dispensable for the existing consumption and there- 
fore of material influence on prices, that organization 
commands a more or less monopolistic position 
within its sphere. 

The maintenance of a higher than average profit 
rate clearly is the result of the elimination, more or less 
complete, of competition. This does not imply that 
monopolies have the power to determine their profit 
rate by fixing prices quite arbitrarily. Monopolies 
may control production and prices, but they cannot 
control consumption. All they can do is to contrive 
such a combination of maximum sales with maximum 
prices as will yield a maximum profit. Similarly 
in buying their material and labor power they cannot 
bear down too heavily on the sellers, as they would 
otherwise in the long run reduce the supplies required. 
To discover what maximum price consumers think 
they can afford to spend for such quantities as would 
prove most profitable to the monopolies, is for these 
a process of experimentation. For example, when 
the elevated railroads in New York started on a 
ten-cent fare it was soon found expedient to reduce it 



Concentration of Industrial Capital 265 

to five cents. On the other hand, estimates for the 
Hudson Tunnel had been based on a five-cent fare. 
The tunnel proved itself popular beyond all expecta- 
tion — a veritable bonanza. It was now easy to 
ascertain whether the public would stand a raise of 
forty per cent. The fare is now seven cents. 

Certain so-called public utility or franchise trusts 
are naturally monopolies and control commodities 
which are indispensable and for which no substitutes 
exist. Such are privately owned water- works, gas 
and electric plants, street railways, telephones, etc. 
The presence of two telephone systems in cities, where 
they exist, is considered a nuisance. These trusts 
have been able to pocket enormous profits with the 
connivance of the politicians, although the latter 
have been obliged of late years, in order to appease 
popular dissatisfaction, to bring about reductions 
of prices or even to municipalize or nationalize some 
public services. 

Much dissatisfaction is directed also against the 
trusts in the manufacturing, extractive, and trans- 
portation industries, and is mainly nursed by capi- 
talists still in the competitive stage and by the 
middle class. By the latter we mean owners of 
means of production who perform productive labor, 
either alone or with the assistance of wage- workers, 
and are thus not advanced to mere commandership 
of labor. The great bulk of this middle class is 
composed of farmers. To these strata of society 
"monopoly" is a term of reproach, and if they know 
anything about themselves, it is that they are 
" an ti -monopolists." They are always hopeful of 



266 Capital To-Day 

action against trusts by legislation and government 
suits, disappointed when these have remained with- 
out effect, and astonished when they have even 
resulted in further concentration, as when the dis- 
solution of the Oil Trust resulted in a reduction of 
the number of the stockholders by 14,142 between 
June 30, 1912, and June 30, 1913. The impressions 
of these social strata are determined by the way mon- 
opoly affects them ; a real understanding of the histori- 
cal significance of industrial monopolization in our 
generation would interfere with their defense of their 
interests as they understand them. But the working 
class, having a historical mission, is eminently in- 
terested in acquiring that understanding. 

Competition pre-supposes a fairly equal opportu- 
nity between economic rivals, a disadvantage in one 
respect being sometimes offset by an advantage in 
another respect. Such an equilibrium of forces is 
in constant danger of being upset. The advantages 
constantly sought and often gained by some of the com- 
petitors are apt to lead to the permanent discom- 
fiture of others, because such advantages are of the 
nature of at least temporary monopoly. The whole 
capitalist system of production, built up on the founda- 
tion of free competition, is a process of elimination 
of competition and of attainment of monopoly. Every 
accumulation of capital from profit, every new pro- 
cess or new machine, before coming into general use, 
was a step in the direction of monopoly. Every 
partnership eliminated competition between two 
capitalists, and the advantage gained by them in the 
volume of their capital and in the blending of their 



Concentration of Industrial Capital 267 

respective capacities interfered with the competi- 
tion of others. The corporation was an extension of 
the principle of monopoly. The stage-coach and the 
freight-dray were tools open to competition; the 
railway is naturally a monopoly. The charters 
granted to corporations by the state are recognitions 
of economic facts already accomplished by society. 
The state itself, as Moody points out, is a monopoly 
which abolished physical competition with fists and 
clubs. The more perfect social monopoly of the 
future will stand in the same relation to present-day 
economic competition, as the present state stands 
to physical competition during savagery. The 
unconscious tendency of human evolution has been 
to weld the race into an organism, and a perfect 
organism is a perfect monopoly. 

In the face of such a fundamental tendency it is 
clear that all anti-trust legislation and judicial 
prosecution of trusts must prove to be futile in the 
future, as they have been in the past. The class 
of individual capitalists, which now advocates such 
measures, had a great deal to say when the hand-loom 
weavers destroyed the first power-looms. These 
machines were economizers of labor, certainly, but 
so are the trusts with their large scale production by 
the most improved processes, in the most favorable 
localities; their control of the production of their 
materials; their industrial utilization of waste pro- 
ducts; their annexation of accessory industries; their 
general elimination of waste. When the Match Trust 
was organized by a consolidation of thirty-one plants, 
eighteen of them were closed and the remaining 



268 Capital To-Day 

thirteen supplied the country. In June, 1 9 14, the 
formation of an international Thermos Bottle Trust 
was reported; the glass parts were to be made in 
Germany, the metal parts in the United States. 
This evidently means that the English and Canadian 
factories are to be closed. To the anti-trust capi- 
talists the difference between the introduction of the 
power-loom and of the trust resolves itself into the 
question : whose cow is gored ? Let these gentlemen 
formulate a law which on the one hand does not 
interfere with the juridical property rights, to which 
they are wedded, and on the other hand permits the 
conduct of an enterprise to its best advantage, — - 
a principle in which they likewise profess to believe. 

Now, what are the economic relations between the 
monopolies, the competitive capitalists, and the 
workers ? 

The value added to the materials by labor in a 
given time, as a year, is a definite quantity. 

Subtraction from the sum of this value of the sum 
of wages paid gives the sum of surplus-value. 

Division of the sum of surplus-value by the sum 
of the capital gives the profit rate. 

These arithmetical rules are the explanation why 
the general profit rate might be say 30 or 40% and 
is not 5% or 100%. The prevalent notion that 
competition regulates the profit rate is the result of 
ignorance of the theory of value. This matter has 
already been referred to in Chapter IX., where it is 
shown that competition only accounts for oscillations 
of prices from value, but not for value itself. Com- 
petition does not create the profit rate, but only 



Concentration of Industrial Capital 269 

equalizes it first within a sphere and then between 
spheres of production. The essential point to com- 
prehend is that profit is not just something tacked on 
to the price, but a definite quantity. 

As the total new value created by labor regulates 
the total surplus- value, it follows that the law of 
value limits the total price at which the commodities 
are sold. This price is therefore the capitalistic 
production price which includes the unpaid labor. 
The proportion of the latter to the paid labor varies 
among the different industries, but the rate of surplus 
labor performed in each is left out of account in 
capitalist society which apportions profits not pro 
rata of labor performed, but pro rata of capital 
employed. Hence the deviations of prices of in- 
dividual commodities from their values, as illus- 
trated in Chapter IX. The plus and the minus of 
prices, relative to value, balance each other, and the 
total price equals the total value. 

The total value added to materials forms the 
revenue of the people, one part, in the form of wages, 
going to the workers in payment of the value of their 
labor power; the other part, in the form of profit 
(including interest), being divided by the capitalists, 
who surrender a portion of the profit to the land- 
owners in ground rent. 

Since the revenue of the capitalists collectively is 
thus a definite quantity, it follows that if some 
among them manage to appropriate more than the 
share due them according to the general profit rate, 
others must receive correspondingly less. 

The single concerns differ from each other greatly 



270 Capital To-Day 

in size and efficiency. We have shown elsewhere 
(Chapter X.) from census figures and logical inference 
therefrom that about i% of the number of manu- 
facturing concerns produce 50% of the total value. 
But this I % includes both the firm having a produc- 
tion of one million dollars and the Steel Trust with a 
production of 800 million dollars. That the numeri- 
cal predominance of the smaller concerns in the 1% 
is enormous goes without saying, and the fact 
emphasizes the almost infinitesimal relative small- 
ness numerically of the large trusts. Concerning the 
calibre of the other 99% of concerns, producing the 
other 50% of value, we need not lose any words. 

The products of all of these concerns, large or 
small, may be ranged for the purpose of theoretic 
economics into two classes : one consisting of articles 
of productive consumption, the other consisting of 
articles of individual consumption. 

Articles of the first mentioned class are sold by one 
capitalist to the other either to serve permanently 
as fixed capital or to be converted into articles of 
individual consumption. 

The second class of articles is sold directly to the 
individual consumers. 

As the productiveness of labor increases, the value 
of commodities decreases. The competing capi- 
talists sell at the decreased value. But not so 
necessarily the monopolies. Not that these have it 
in their power to make a fool of the law of value. 
The totality of all commodities cannot be sold above 
their value by one cent. The monopoly's products 
are included therein, and, in order to be sold, cannot 



Concentration of Industrial Capital 271 

appeal to anything else than the definite income of the 
people. 

But what the law of value permits the monopolies 
to do is to enforce an unequal division of the social 
surplus value as between themselves and the competi- 
tive capitalists. This, of course, is a violation of the 
time-honored principle: for equal capital equal 
profit. But the monopolies proclaim a new principle : 
one average rate of profit for monopolies, another 
average rate of profit for competitive capital. 

If a monopoly produces articles for productive 
consumption, it can fix its prices at such a high level 
as to leave to the converting industrialist only a 
scant margin between his cost of production and the 
value of his finished product. This proceeding would 
be impossible, if the view were not erroneous that 
the source of profit is in the simple addition of a 
percentage to the cost price. Commodities are sold 
at their value. In selling articles for productive 
consumption above their value, the monopoly 
realizes not only the surplus value produced by its 
own workers, but appropriates part of the surplus 
value which is to be produced by the workers of 
the converting capitalist. 

Supposing, however, that a monopoly product 
constitutes so large an element of the cost of the 
finished article of individual consumption as to 
nullify in a given converting industry even the 
reduced average profit rate of competitive capital, 
then only two solutions of the questions are possible : 
Either it is the purpose of the monopoly to drive a 
particular division of converting capitalists out of 



2^2 Capital To-Day 

business entirely and to annex this branch of industry; 
or such a division of hard-pressed capitalists suc- 
ceeds in its turn in selling its finished products above 
their value. This is only possible at the expense of 
the prices of other products into whose cost the 
monopoly price of the materials enters as a less 
important element. For example: both groups of 
competitive capitalists have an average cost of 80, 
an average profit of 20, selling at 100 each, or 200 
for both. Now the cost for group A is raised by the 
monopoly to 90 and this group manages to sell at 
105. But the social revenue available for both 
groups being only 200, group B is compelled to 
reduce its price to 95. The general profit rate for 
competitive capital still rules, but has been reduced 
from 20 to 15. One group of competitive capitalists 
has been able to shift part of its oppression on to the 
other group, so that all are in the end squeezed by the 
force of monopoly against the stone wall of the law 
of value. 

Here it might occur to somebody that the capi- 
talists of a particular country might find an escape 
from this law by giving only part of their products 
for the whole available revenue and exporting the 
balance. But it does not require much thinking to 
perceive that even if the capitalists of one country 
could thus circumvent the law of value, the whole 
international class of capitalists cannot. However, 
the mere exchange of values with a foreign country 
does not alter the situation for the single country in 
the least. And in such cases where products are 
exported, not as merchandise, but as capital for 



Concentration of Industrial Capital 273 

foreign investment, like steel rails and locomotives 
in lieu of money, the only difference is that the 
equivalent will return gradually as profit, instead of 
immediately. The foreign products, whether re- 
ceived in the exchange, or representing profit on the 
investment, are subject, as regards their prices 
and their economic effects on the different classes 
of consumers, to the same laws as the domestic 
products. 

The competitive capitalists are unable to turn the 
tables on the monopoly in cases in which they are 
themselves the producers of primary materials and 
the monopoly i^ the converter, because of their 
disadvantageous position as competitors. 

From the forgoing consideration of the trusts, in so 
far as they are producers of articles of productive 
consumption, it appears that their extra profits are 
entirely the result of a new adjustment within the 
capitalist class in relation to the division of the 
surplus-value, although they may be reflected for 
different consumers of different finished products 
in contrary price movements, balancing each other. 

We shall now consider the effect of the maintenance 
of artificially high prices by trusts producing articles 
of individual consumption. 

If a trust sells such articles through merchants, it 

can apply to them the same tactics as practiced 

toward the productive capitalists, even to the extent 

of prescribing to the merchants the exact prices at 

which they must sell the trust's products, practically 

reducing them to the position of commission salesmen. 

If a trust sells directly, eliminating the merchant, it 
18 



274 Capital To-Day 

will first of all pocket the merchant's profit; in the 
second place it will be able in many instances to sell 
its products above their value, which is only possible, 
as we know, to the /corresponding detriment of the 
prices of other products. 

Such instances, may, nevertheless, produce certain 
important economic effects, depending on whether 
the overpriced products enter generally into the 
consumption of the capitalists or into that of the 
workers. 

If consumed by the industrial capitalist, whose 
profit had already been cut by a trust, he finds him- 
self mulcted again, when purchasing the kinds of 
goods consumed by his class. He must lower his 
standard of life or live on a scale not warranted by his 
income. That the latter takes place largely is shown 
by the alarming increase of loans by life insurance 
companies to their policyholders. "" 

^ The New York Press, December i6, 1913, contained the follow- 
ing: 

"There is no more telling indication of the heavy spendings of 
Americans [which Americans?] than the showing that borrowing of 
money on life insurance policies is constantly increasing, till it has 
come to alarm insurance executives. In 1888 these loans aggregated 
only 3 1 per cent, of the reserves of the companies; in 19 12 this had 
advanced to 16.03 per cent, and 1913 will make a record of about 
18 per cent. 

"The convention of life insurance presidents has given serious 
attention to these conditions. The reserves of the companies 
aggregate nearly four billions of dollars, on which loans of 18 
per cent, would be 1^720,000,000. The insurance policy on which 
money is borrowed is invalidated in the proportion that loan bears 
to the amount which has been paid in on the policy. Therefore a 
vast share of the insurance nominally in force is in fact affording no 
protection at all. Moreover, it was stated that when once a policy- 



Concentration of Industrial Capital 275 

In a similar situation are those capitalists whose 
revenue is not, or only very remotely, influenced by 
particular profit rates, but is a fixed quantity. The 
extra profit of the trust is a clear deduction from their 
share in the social surplus value. To this group 
belong capitalists whose money is invested at fixed 
rates of interest; a large element of other non- 
producers with otherwise fixed incomes; the land- 
owners, and the owners of rented houses and other 
buildings. The "landlords" appear in the dual 
character of landowners, receiving ground rent, 
and capitalists, receiving interest on a commodity 
(houses) as the equivalent of money. 

The case is different as regards any overpriced prod- 
ucts which enter into the consumption of the workers. 

In the first place such products may be inexpensive 
things, like pipe-tobacco, matches, etc., of not much 
importance in a worker's budget, although the total 
mass consumed affords spheres for the existence of 
important trusts. But presuming that trusts, com- 
manding the necessaries of life, were generally or 
very extensively to raise prices artificially, would the 
workers be in the same helpless situation as the social 
groups enumerated in the previous paragraph? 

holder takes out a loan, experience shows that in only one case in 
ten does he ever repay that loan. 

"It is recognized by the life insurance men that if this tendency 
shall continue confidence in insurance will be lost. Very many 
men, it is explained, make loans on their policies without their 
families knowing of the thing. At death, therefore, the facts are 
recalled by those who expected to be the beneficiaries. That kind 
of experience is certain to injure the repute of insurance as a protec- 
tion to the family." 



276 Capital To-Day 

The answer is : the necessaries of life are so to say 
the raw material for the reproduction of labor power. 
The latter is a commodity selling, like every 
other, at its value or the cost of its reproduction. 
This cost depends on the price of those necessaries 
of life which, as the result of history, climate, etc., 
have become second nature to the workers and are 
therefore considered indispensable by them. If the 
necessaries of life advance, wages follow. Until 
wages have caught up with prices, the price of labor 
power is temporarily below its value, the same as it 
occasionally, under particularly favorable circum- 
stances, rises temporarily above its value. 

Given, however, a condition in which wages have 
advanced as much or even somewhat more than 
prices of industrial products, though much less than 
agricultural products and rent, then there has taken 
place a decline of the value of labor power, or in other 
words a lowering of the worker's standard of life. 

That the huge profits of trusts and other large 
corporations are not made at the expense of the 
consumers, as a body, is not only a necessary theoreti- 
cal conclusion, but is practically proven by the 
comparatively slight rise of the prices of manu- 
factured articles,^ which are precisely the products 
fashioned from materials largely controlled by 
trusts. Even this slight rise has been accounted 
for by other factors. ^ 

But confronting these huge profits with the 
enormous general rate of exploitation of the workers, 

^ Refer to figures, p. 103. 

' Refer to inquiry into rising prices p. 104. . -^ 



Concentration of Industrial Capital 277 

the calculation of which we presented in Chapter 
VIII., and remembering that the trusts appropriate 
part of the other capitalists' share of the surplus value 
in addition to their own, we find that both sets of 
figures go far in confirming each other. They 
reveal the real source of the growing power of concen- 
trated industrial capital. 

From the forgoing analysis it appears that the 
sting of the trust movement is directed against the 
competitive capitaUsts, productive and mercantile. 
This movement for the further extension of the 
trusts tends to the final elimination of competition 
and to reducing the remaining capitalists to mere 
functionaries, though left nominally independent. 
When that consummation is reached, the mainte- 
nance of the average profit rate becomes an issue 
between the trusts themselves, as those among them 
producing indispensable necessaries of life might 
extort a higher than average rate of profit. This, we 
now understand, they could only do at the expense 
of the capitalists of other trusts who likewise must 
realize their profit out of the same common revenue 
fund of the workers and capitalists, the strictly 
limited total of wages and surplus value. Such 
violation of the sacred principle of equality of every- 
thing that bears the countenance of capital capitalist 
society must find the means of preventing, as it has 
always endeavored to do. Indeed, the economic 
power that will ultimately enforce a uniform profit 
rate among the industries already exists — the cen- 
tralized money-power which forms the subject of the 
next chapter. 



278 Capital To-Day 

So long as capitalist society has not passed the 
zenith of its expansibility and until the centralized 
economic power of the capitalist class rules absolutely 
the economic life of nations, the value of labor 
power remains unaffected by the process of mon- 
opolization. And as it is a historic necessity that 
capitalism shall largely work out its inherent ten- 
dency, the workers have no economic reason for 
supporting the anti-trust action of the small capitalists 
and the middle class. Monopolies being the out- 
growth of competition, they had to become private 
monopolies managed for the benefit of private 
interests, as opposed to any outside interest. Why 
do not the anti-monopoly capitalists advocate 
advancing to the next step of evolution, social 
monopoly? Why rather "bust the trusts"? The 
reason is that these little capitalists are back numbers 
and hope to save themselves by turning back the 
hands on the dial of time. 

Competition will continue, as in the past, to breed 
monopolies. For this it is not necessary that com- 
petition in an industry be carried to its logical end, 
the single survivor. Men are sensible beings and 
combine into a monopoly before great destruction of 
capital ensues from a final struggle between Titans. 
Before this desperate pass is reached monopolies 
are brought about by almost any available means. 
These have often been of worse than questionable 
nature, ranging from the morally reprehensible to 
the downright criminal. But all history is replete 
with just such facts, and it is only when the strife 
is over and men are able to look backwards after a 



Concentration of Industrial Capital 279 

long time that history seems to justify the means 
by the end attained. So it is also with the unlovable 
personality of the pioneers of monopoly who are 
personally made the object of unfavorable criticism. 
They are, it is true, typical, at least in America, of 
the class of men described by James Bryce in these 
words ' : * ' In no country does one find so many men 
of eminent capacity for business, shrewd, forcible, 
and daring, who are so uninteresting, so intellectually 
barren, outside the sphere of their business knowl- 
edge." The purpose of these men is to work for 
their personal advantage, but in the end their 
activities will have had the effect of making possible 
the production of great wealth at a minimum of 
labor. 

The corporation is the abolition of capital as 
private property within the limits of the capitalist 
system of production. The function of capital is 
divorced from its ownership, and profit presents 
itself as the plain appropriation of the surplus labor 
of others. Theoretically the highest development 
of the capitalist system of production would be 
reached with the universal holding company, or 
trust of trusts, and with it the end of anarchy and 
money. But inasmuch as the development of the 
monetary system proceeds at a much quicker rate 
than that of industrial concentration, the strain on 
the former will become acute before the culmination 
of the latter is reached. The present social system 
will thus become untenable before it can com- 
pletely work out its logical ultimate consequences in 

^ American Commonwealth, part iv., chap. 8i. 



28o Capital To-Day 

the realm of industrial organization. However, 
concentration in most industries is even now 
sufficiently advanced for their re-transfer to the 
producers. 

These most concentrated industries are at the same 
time the fundamental industries on which all others 
depend for the means of production, such as coal, 
iron, petroleum, natural gas, copper, electric works, 
heavy machinery, chemicals, railroads, etc. The 
direct socialization of these industries would have the 
effect of indirect socialization of the scattered smaller 
industries, largely producing articles of individual 
consumption, as well as of agriculture. ' 

' Little reference has been made to agriculture in these pages. 
Others have specialized in collecting data regarding economic 
tendencies in agriculture in the interest of economic science. We 
believe that their painstaking labors are largely wasted. They 
appear to be animated by the idea that the impending social trans- 
formation must wait until the technical and economic development 
of agriculture will have fairly caught up with the industries and that 
the social change will be one grand event. But the preponderance 
of reasons favors a gradual process of transformation, in so far 
as the latter depends on the further development and concentration 
of the means of production. Only the socialization of the large 
primary industries is immediately essential; the others, including 
agriculture, can be left to their development, profoundly influenced 
as they are bound to be by the new social atmosphere. 

If, however, as is to be anticipated, the gradual transformation 
is crossed and brought to a sudden end by the breakdown of the 
financial mechanism, then it will be entirely immaterial in what 
stage of development agriculture and other backward industries 
may be found at that moment. To the extent that agriculture 
produces commodities (and not for consumption on the farm), the 
old individualistic system is inhibited hy force majeure and must 
perforce be replaced by social control of the distribution of agricul- 
tural products as use-values. 



Concentration of Industrial Capital 281 

Already the contradiction between the social nature 
of production and the private power of a few mag- 
nates, who are masters thereof, is challenging the 
intervention of the state. Timidly the latter essays 
control by boards. But efficient control without 
ownership is impossible, and, whereas private owner- 
ship of railroads, for instance, was not questioned a 
very few years ago by anybody but the Socialists, 
voices are now heard even of capitalists of national 
reputation predicting the nationalization of the 
important transportation and communication indus- 
tries. On the floor of the Senate a prominent 
Republican member. Senator Borah of Idaho, on 
July 3, 1914, said that ' Vithin ten years we will face 
the question of the public ownership of railroads 
because of the breakdown of regulation." The busi- 
ness of the Express Trust is being gradually taken 
over by the Post Office, transfer to which also of the 
telephone and telegraph is advocated by Postmaster 
General Burleson. 

The steam railroads constitute the largest indus- 
trial concentration in the country. This consists of 
about 1040 companies,' now controlled by ten main 
railroads through a system of pyramiding of stock 
ownership, such as described above in relation to the 
Pennsylvania Railroad, and also through long leases. 
These ten companies are: Pennsylvania, New York 
Central, New Haven, Southern, Chicago & North- 
western, Chicago, Milwaukee & St. Paul, Great 
Northern, Northern Pacific, Union Pacific, and Atchi- 

* Truth about Trusts, John Moody, p. 476. 



282 Capital To-Day 

son, Topeka & Santa Fe. Their combined share 
capital is $2,451,737,000. 

Now, if the government should shrink from apply- 
ing the fundamental principle enunciated by Justice 
Brewer of the Supreme Court and quoted in the last 
chapter and deprive the railroads of their character 
as capital by simple legislative enactment, there 
still remains another alternative of the United States 
acquiring ownership of the railroads without the 
expenditure of a cent. 

This sounds startling to those who believe that 
corporations have raised an effectual barrier against 
nationalization by their high capitalization. But 
we have seen above that the holders of the shares 
of ten companies control the entire railroad system 
of the country. These shares, whose market value in 
June, 1 9 14, was about $2,700,000,000, can be acquired 
by the government by condemnation proceedings 
authorized by Congress. The constitutionality of 
such condemnation has been expressly affirmed by 
the United States Supreme Court ^ ; moreover, we are 
used to condemnation of private property for public 
or quasi-public purposes, such as the condemnation 
of private lands by the railroads themselves, or that 
of the land of Irish landlords by the government for 
the purpose of creating peasant proprietorship. 

The money to pay for the shares could be easily 
raised against the government's three per cent, 
bonds. The amount is less than the war debt when 
the country's population was one third and its wealth 
(real and fictitious) much less than a third of what it is 

^ 203 United States, 372. 



Concentration of Industrial Capital 283 

now. The small interest service and the amortiza- 
tion would for a time be a charge on the service; 
otherwise the railroads could be operated on the same 
principle as the Post Office, that is for the benefit of 
the people and not as a means of indirect taxation, 
as done by the military states of Europe. 

The practical ownership of the railroads by the 
government carries with it the immediate practical 
ownership of the Anthracite Coal Trust owned by 
the coal-carrying roads, and would go far toward 
control of all large industries. 



CHAPTER XII 

THE CONCENTRATION OF MONEY CAPITAL 

FIFTY years ago, as the reader will remember, 
the accumulation of money capital in the banks 
was in its infancy. The figures given in Chapter VI. 
of the total deposits of all banks in the United States 
in 1863 are to-day matched by the combined deposits 
of two banking establishments in New York; two 
direct instruments of the now centralized money 
power. 

At that time the banks were all chartered by the 
States on insecure financial bases, doing generally a 
neighborhood commercial lending business, except 
that they issued paper money which had a habit of 
depreciating more or less. Besides the commercial 
banks there were savings banks, investing their 
funds in real estate mortgages, then the only safe 
investment, as the new-fangled railroad securities 
were still in the experimental stage. 

Aside from the commercial and savings banks the 

only accumulations of consequence of loanable 

capital were in the life insurance companies, which, 

like the savings banks, invested mainly in real 

estate mortgages. From $1,000,000 in 1843 their 

assets had grown to $125,000,000 in 1867 (the year 

284 



Concentration of Money Capital 285 

in which the first volume of Capital was pub- 
lished), yet nobody could have foreseen that it 
would be particularly this kind of bank which, with 
billions of assets, would some day form one of the 
main supports of the centralized money power. 

This great power, for which there does not yet even 
exist — so recent is its history and so little understood 
its scope — a generally accepted name, being variously 
designated as "Money Trust," "Money Power,'* 
"The System," "Financial Capital, " etc., has its 
seat in "Wall Street," an abbreviated appellation 
of the financial district of New York City. There 
are its great banks, with treasure which can be de- 
fended on the instant by an impenetrable wall of 
burning steam, like Brunhilde on her rock. And 
there is the other outfit, indispensable for the pres- 
ent, the stock exchange, with which is connected 
the only open money market in the United States. 

This district has become what it is, because it had 
been previously the business section of the dry- 
goods importers, the wealthiest class of merchants 
in the most important seaport. They graduated 
as naturally into financiers under then existing condi- 
tions, as at one time the Italian goldsmiths in London, 
from being buyers of bullion, graduated into that 
city's bankers. 

About the middle of last century the textile indus- 
try was still, as it had been for a century, the most 
important industry of Europe and the importation 
of dry-goods was the most aristocratic business 
in this country. That was before the metal industry, 
which furnishes our machinery, railroads, telegraphs, 



286 Capital To-Day 

steamships, bridges, tubes, skyscrapers, assumed 
for modern nations greater importance than the 
mere providing of raiment. 

At that time the money for building the numerous 
short lines of railroad had been gathered partly 
from local banks and private hoards, but mainly 
from subsidies by local communities — states, counties, 
and municipalities. Little of it was to be had 
abroad. The total foreign holdings, including State, 
railroad, and other bonds, were estimated to have 
amounted in 1854 to only 200 millions, and in 1857 
to 400 millions, as against an estimate of six billions 
now. In the latter year a panic broke out in which 
every single bank in the United States stopped pay- 
ment, and it became necessary to export gold instead 
of papers. 

But then came the Civil War and during its course 
the government had to borrow heavily, the debt 
rising from 65 millions in i860 to its maximum of 
2845 millions in 1865. A great part of the money 
had to be raised abroad. The exportation of govern- 
ment bonds was of course effected from the principal 
port. New York, and the agency naturally fell to the 
dry-goods importers, the men with the most influen- 
tial foreign connections and equipped with the best 
understanding of international finance. They were 
the more willing to undertake the commerce of bond 
exportation, as the defection of the prosperous South 
had crippled their dry-goods business. Prominent 
among these importers were the houses of Morgan 
and of Peabody, names now identified respectively 
with the leadership of the inner group of the money 



Concentration of Money Capital 287 

power and one of its most direct and important 
allies. The dry-goods men, who meanwhile had also 
assumed the management of the life insurance 
companies, were now metamorphosed into ''private 
bankers." 

In 1863 the National Bank act was passed for the 
purpose of superseding the State bank circulation 
by a circulation based on ownership of United 
States bonds, thereby creating a market for the 
latter. The chief agency for the sale of its bonds to 
the new national banks had been entrusted by the 
government to the banking house of Jay Cooke & 
Co., who, however, heavily involved in railroads, 
failed in 1873. Associates of Cooke started business 
for themselves, organized formally as a national 
bank, but actually rather as a partnership with a few 
silent partners. This was the First National Bank 
of New York, to which went logically the domestic 
bond trade of the failed firm of Cooke. Its guiding 
spirit was then, as it is to-day, George F. Baker, one 
of the triumvirate now in active control of the nation's 
economic life. 

The year 1879 is memorable in that it saw the 
cessation of government bond issues, the resumption 
of specie payment, and the consolidation of the 
Standard Oil Co. These events produced a change 
in the character of Wall Street. Hitherto mainly 
the national market for speculation in the value 
relation of gold and paper tokens, it now turned its 
attention to shares in industrial corporations. It 
was the beginning of the movement toward the 
control of industry from this center. 



288 Capital To-Day 

"Competition is the life of trade" was the motto 
of the industrial capitalist of yore. He said this 
with much glee when he, as the only buyer, met 
several sellers, but he said it with a sigh when, one 
among several sellers, he met one buyer. As we 
now look back, we can clearly see that the general 
formula of the process of concentration has been 
*'From competition via threatening ruin or actual 
bankruptcy to combination," — exactly as predicted 
by Marx nearly half a century ago. 

The principle that ** competition is impossible 
where combination is possible," to use the words 
of Stephenson, the inventor of the locomotive, was 
worked out in practice mainly by two men, J. Pierpont 
Morgan and John D. Rockefeller, the former starting 
from the railroad business, the latter from the extrac- 
tion and refining of petroleum. 

''A double-track railroad costs not more than 
two thirds as much as two single-track roads. It will 
do four times as much work."^ Consequently in 
building competing single-track roads, instead of 
double tracking existing ones, five-sixths of the 
capital is wasted. Nevertheless the railroads were 
built preferably single-track, for in the United 
States, from historical reasons, the fetichism of free 
competition, and capitalistic anarchy generally, 
was more rampant than it ever was or could have 
been in any other country. Enlightened men knew 
that low prices can come only from efficiency, but the 
Interstate Commerce Act, passed in 1887, bade the 
roads compete to the utmost, the expectation having 

* John Moody and G. K. Turner in McClure^s, June, 191 1, p. 188. 



Concentration of Money Capital 289 

been that low prices would come from competition 
even between inefficients. 

By the bankruptcy of the railroads in 1893, their 
control fell at once largely into the hands of two small 
sets of men grouped around Morgan and Rockefeller. 
Somebody had to pick up the wreckage. The people 
of the United States, who had always been convinced 
that the state is only good for the job of night watch- 
man, would not have accepted the railroads as a 
gift. So the property was thrust at Morgan and the 
Rockefeller group. 

The latter represented the first important American 
accumulation of money capital. Before the exist- 
ence of the Standard Oil Co. the great sources of 
capital had been England, Germany, and Holland, 
mainly the first-mentioned country. With a clear 
vision of the advantages which would accrue to 
possessors of money from the progressive bankruptcy 
of competing refiners and railroads, Rockefeller 
always kept a large part of the company's profits in 
the shape of money. Poverty-stricken, competitive 
railroads, in need of cash, could be beaten into grant- 
ing secret freight rates which put the competing 
refiners out of business. These were then bought 
out by the trust at bargain prices. When the time 
came, the trust, its large cash funds united with 
those of the National City Bank, its creation in 
association with James Stillman, then as now the 
largest bank in the country, and allied with Kuhn, 
Loeb & Co. by the initiative of Harriman, was ready, 
under the latter's leadership, to acquire control of a 
large part of the bankrupt railroads by purchases of 
19 



290 Capital To-Day 

their stocks. This was not as difficult an under- 
taking as might be supposed. Of the capitalization 
of the railroads about one half, the bonds, represented 
nominally debt, the other half, the stock, nominally 
ownership. This stock could then generally be 
bought at from a quarter of its par value down to 
very little. For reasons already stated in the last 
chapter (mainly the supineness of the scattered 
stockholders) it was deemed sufficient for control 
to command fifteen to at most thirty per cent, of 
the stock. It follows that a sum of money equal to 
from two to three per cent, of the capitalization was 
sufficient for control. 

As soon as those in control of the management 
were able to discern which systems had the best 
prospects, they could increase their holdings at very 
low prices. 

Morgan, commissioned by his clients, the English 
bondholders, reorganized the bankrupt roads east of 
the Mississippi, leaving those west of the river, except 
the Northern Pacific, to the above-described group 
of great capitalists. In every case he required from 
the hopeless holders of almost worthless stock abso- 
lute dictatorship through the ** voting trust," which 
meant the power of voting all the stock until the 
roads would be able to pay dividends. He combined 
the roads into large systems, which thus formed a 
monopoly in his hands. 

The improvement in the efficiency of the roads 
under concentrated control and their increasing 
prOvSperity caused a flow of money to New York, 
where it was distributed by their masters among 



Concentration of Money Capital 291 

already existing banks and trust companies which 
thus came under the control either of Morgan or the 
Standard Oil-City Bank-Kuhn Loeb group, or among 
new institutions founded by them, respectively. 
These railroad funds on deposit in New York in 
their turn furnished additional means for the further 
concentration of industry. 

The turn of the century came to be another 
important milestone, as had been 1879, in the devel- 
opment of monopoly. Competition in the manu- 
facturing industries had led to a state of affairs 
similar to that which had previously existed in the 
transportation industry. The time had come for a 
general movement toward their monopolization. 
The most conspicuous case was that of the steel 
industry which was threatened with ruinous com- 
petition and was consolidated by Morgan, himself 
retaining the supreme power in this trust, the same 
as he had done in the reorganized railroads. With- 
out his approval no director in this great corporation 
can be named. ^ 

The manifest advantages of combination and high 
capitalization encouraged imitation even by indus- 
tries which had not yet felt too severely the pinch of 
competition. 

Heretofore the house of Morgan had not been a 
promoting concern, its chief business having been the 
sale of bonds to its European clients, whose interests 
it subsequently represented in the railroad bank- 
ruptcies. The reputation acquired by Morgan in 
this performance made him now the public institu- 

^ See Report Congressional Committee (Pujo Committee), p. 134. 



292 Capital To-Day 

tion for combining and financing trusts. Industries 
applied to him for consolidation in numbers increas- 
ing year by year. The issuing business of the house 
grew to such proportions that its own resources be- 
came insufficient for carrying the necessary mass of 
securities, no matter how excellent its facilities were 
for their speedy turn-over. 

At this juncture Morgan effected an alliance, joint 
account, or general community of interest with Baker, 
whose First National Bank had continued to be the 
leading dealer in securities in the domestic market 
and possessed resources not much inferior to those 
of the City Bank. Its business had been exceedingly 
profitable. The average annual profits for twenty 
years have been about 1500% on the capital originally 
invested in 1864, viz., $500,000, and a $100 share 
of that original stock has now come to represent 
a market value of $20,000. Another alliance was 
formed by Morgan with James J. Hill, a man of 
considerable banking influence in his empire in the 
Northwest, as well as in New York. 

All the great banks and trust companies had now 
been brought into the fold of either one or the other of 
the two groups. Between these antagonism continued 
and burst forth in the attempt, in 1901, under the 
active leadership of Kuhn, Loeb & Co., to wrest 
control of Northern Pacific from the Morgan-Hill 
group. These had considered themselves safe in 
the control of 15% of the stock, but the enemy 
quietly bought 20% and then called on Morgan- 
Hill to surrender. But the real battle had only 
begun then for obtaining a majority of the stock, 



Concentration of Money Capital 293 

which finally reached a price of $1000 for each 
share, — a terrible sacrifice for each party, almost 
precipitating a financial panic. Peace was arranged, 
the costly experiment was never to be repeated, and 
as a guaranty of future harmony between the two 
groups, members of each entered the other's banks 
and trust companies as directors. 

It was fortunate that the groups came to an un- 
derstanding. The overcapitalization of the trusts 
founded in this period exercised before long a great 
strain on the money of account. The overrated 
shares declined tremendously, and the severe panic 
of 1907 was the result. For their protection the 
two groups stood together as one man, and the out- 
come of the panic was their complete cementing 
into a single power, controlling the industries of the 
country. 

The evolution of scattered into concentrated 
capital must not, however, be understood as al- 
together a process forced by economic necessity or 
according to a rigid economic formula. History 
has its laws, but it finds no ready rut to move in. 
The fulfillment of its purposes has often been accele- 
rated by crimes. To be sure this fact is not pleasant 
to contemplate, but our ethical sensibilities cannot 
change the stuff of which history is largely made. 

Thus when bankruptcy of railroads and other 
industries did not come along readily enough for the 
desired concentration, other means were used to 
bring about this consummation. Hear what the 
Pujo Committee says^: 

» Report, part iii, chap. 3, sec. 11. 



294 Capital To-Day 

. . . within the past thirty years the bulk of our rail- 
ways have gone through insolvency and receivership. 
The proceedings are sometimes instigated by the man- 
agement through a friendly creditor (and are then gener- 
ally collusive in their inception) or through the trustee 
for bondholders . . . one or more of the officers under 
whose administration insolvency was brought about, 
or their nominees, is made a receiver. . . . Neither 
creditors nor stockholders, who are the parties really 
interested, are notified or have an opportunity to be 
heard either on the question of insolvency or of the 
personnel of the receivers. The stage has been set in 
advance ... a self-constituted committee is announced, 
frequently consisting of men well known in the financial 
world, . . . selected by a leading banking house. This 
committee in due course presents a plan for the reorganiza- 
tion of the property. If the security holders do not like 
it, their only alternative is to form another committee, 
if they can arrange to combine their scattered forces and 
find . . . the banking house . . . who can finance the 
cash requirements of these colossal transactions in 
hostility to the banking house that was first in the 
field. . . . It is well-nigh impossible to find rival banking 
houses to lead the opposition. The usual outcome has 
been that the defenseless security holders take whatever 
plan is offered, however unjust, as against the alternative 
of being entirely wiped out. There have been rare 
exceptions, before the power of these banking houses 
became irresistible, when the security holders have 
wrung concessions through revolt. . . . Generally, after 
years of delay, the property is put through the form of a 
sale, but there is no bid except that of the committee. 
... If a security holder has failed to deposit with the 
committee he gets nothing. . . . No constituted author- 
ity supervises the vast expenses he is required to pay. 



Concentration of Money Capital 295 

The bankers and the committee are made the sole judges 
over that and on every other conceivable question, 
including their own commissions and charges. . . . 

The report adds that Morgan & Co. and Kuhn, 
Loeb & Co. secured domination in that way of the 
following railroad systems: Baltimore & Ohio — 
Chesapeake & Ohio — Cincinnati, Hamilton & Dayton 
— Chicago & Great Western — Erie — Northern Pa- 
cific — Pere Marquette — Southern — Reading — Union 
Pacific — and that the same abuses exist in the so- 
called industrial corporations (as distinguished by 
the committee from railroads) . 

In the face of such facts the following extract from 
an address by John Skelton Williams, Controller of 
the Currency, at Raleigh, S. C, on May 13, 19 14, 
scarcely merits the New York Times' characterization 
as a "fancy picture." Mr. Williams said: 

New York has become the commercial capital of the 
country, the great citadel of the money power, the reser- 
voir of money supply. It is the walled city from which 
the barons have levied tribute on a territory and popula- 
tion vaster than any Lord or King of the Middle Ages 
dreamed of, yet sometimes using methods ruthless and 
savage as those of the fiercest of the robber nobles — 
forays and levies devastating by scientific, artful methods, 
pillaging under form of law, smiting with swords which 
bite deep, although we cannot see them, consuming with 
fire which comes invisible and unsuspected. The simile 
seems strong, but is justified by facts. 

No sudden swoop by a feudal magnate on his peaceful 
neighbors was a more cruel or shameless plundering 
expedition than some of the transactions which have 



296' Capital To-Day 

been brought to light by which the shareholders of the 
railways and other great enterprises, established to build 
up the country and to promote the public interests, were 
despoiled. Their property and money were taken from 
them by the might of masses of money working stealthily. 
The raids had none of the attractions of the picturesque 
or the merit of courage. They were cold-blooded, 
relentless seizure of other men's goods by plots, treachery, 
and betrayal of trusts which should have been held 
sacred. 

If the Pujo Committee and Controller Williams 
have spoiled the halo of sanctity which the average 
citizen is made to believe encircles the heads of the 
munificent Morgan and of the benevolent Jacob H. 
Schiff (head of Kuhn, Loeb & Co.), the Interstate 
Commerce Commission has added its own estimate, 
not alone in this respect, but also in another. In its 
report to the United States Senate anent the financial 
breakdown of the New Haven Railroad system, the 
commission refers to ''the indefensible standard of 
business ethics and the absence of financial acumen 
displayed by eminent financiers in directing the desti- 
nies of this railroad." The three most "eminent 
financiers ' ' on the New Haven board were Morgan, 
Baker, and William Rockefeller. How their over- 
reaching themselves in capitalizations brought on the 
1907 panic has already been referred to. This at 
first threatened to swamp them, although in the end 
it resulted in further concentration, as every crisis 
has done. 

The now absolutely unified money power is 
organized along lines indicated in the Pujo Committee 



Concentration of Money Capital 297 

report, which we here follow principally, as being 
the most authentic source : 

First: The inner group, J. P. Morgan & Co., the 
recognized leaders and official capitalizers of monopolies, 
George F. Baker, and James Stillman. They control 
leading banks and trust companies with resources in 
excess of $1,300,000,000, besides a number of smaller, 
but important, financial institutions, and of course their 
personal fortunes. 

Second: The wholesalers of securities. Related to 
the primary group practically as partners in many of 
their large enterprises. They are principally "private 
bankers" who have not grown as great as Morgan, such 
as Kuhn, Loeb & Co., Lee, Higginson & Co., Kidder, 
Peabody & Co. In Chicago the inner group deals 
mainly with the First National Bank and the Illinois 
Trust & Savings Bank. 

Third: The retailers of securities. Banks and bankers 
throughout the country, hundreds of them. They 
circularize or canvass by solicitors every possible investor. 
Some of them do a business of hundreds of millions of 
dollars a year. 

This is the machinery for the distribution of 
fictitious capital. It employs many persons, but 
the control of the country's industries rests in the 
hands of the inner group who must necessarily 
consult with the Rockefellers, because of their great 
fortune which increases by scores of millions every 
year. 

The issuing houses of the Money Trust, having 
stood sponsor at the organization of some great 
industrial combination and offered its securities to 



298 Capital To-Day 

the investing public, assume an important responsi- 
bility, not so much toward the latter as in relation to 
their own interests. The success or non-success of 
the corporation reflects on the prestige of the issuing 
house and affects its ability to place future flotations 
of other corporations. It is therefore necessary 
that it continue its sponsorial relationship to the 
corporation by being represented on its board of 
directors and by acting as its sole fiscal agent. This 
intimate and permanent relation is advantageous 
to both sides. 

To the industrial corporation it assures the financial 
support and expert guidance of financial kings who 
hobnob with real kings and their prime ministers, 
who command the most authoritative information, 
and who are thus able to judge of the world's political, 
industrial, and financial condition, as no simple 
capitalist can. The connection further vouchsafes 
the corporation freedom from the possibility of com- 
petition, for the Money Trust, represented by the 
issuing house, can afford it such protection, being not 
only in possession of the great reservoirs of money, 
but sufficiently influential to prevent the financing 
of any enterprise not approved by it. 

To the Money Trust the connection assures the 
deposit with one of its banking institutions of the 
cash funds of the corporation. These amount in 
some cases to tens and scores of millions and are 
thus strengthening very materially the system of 
centralized money capital. We have here an endless 
chain of cause and effect working in favor of the 
Money Trust. Through its power it gains a hold 



Concentration of Money Capital 299 

on the industrial corporations; the latter's cash 
funds then become a very material element in the 
totality of the money which the trust controls, 
thereby again adding to its power. Nor are the 
depositaries of the industrial corporations subject 
to the surprises which come to the ordinary commer- 
cial banks in the sudden heavy drawings by a number 
of their large depositors; the fiscal agents will tell 
their corporations at the convenient time when the 
latter may draw heavily on their deposits or apply 
to the money market with new issues of securities. 
The Money Trust as yet evinces no desire of 
being an absolute monopoly, any more than do the 
large industrial trusts. It permits independent 
financing of local or small enterprises, when these do 
not interfere with the interests of the existing indus- 
trial corporations which are under its guardianship. 
It is true that the Money Trust does not directly con- 
trol all the scattered accumulations of money in the 
country, yet the banking institutions which hold 
the same would not risk to incur the displeasure of 
the magnates, lest they should cease to be invited 
by the latter to participate in future underwri tings. 

"The patronage ... is of great value to these banks 
and bankers, who are thus tied by self-interest to the 
great issuing houses and may be regarded as part of this 
vast financial organization. Such patronage yields no 
inconsiderable part of the income of these banks and 
bankers and without much risk. . . . The underwriting 
commissions . . . are usually easily earned and do not 
ordinarily involve the underwriters in the purchase of 
the underwritten securities. Their interest in the 



300 Capital To-Day 

transaction is generally adjusted ... by the payment 
to them of a commission. Bankers and brokers are so 
anxious to be permitted to participate . . . that as a 
rule they join when invited to do so, regardless of their 
approval of the particular business, lest by refusing 
they should thereafter cease to be invited."' 

The Pujo report, which argues for the restoration 
of the defunct competition, by legislation, refers to 
the men controlling this vast system as ''this handful 
of self-constituted trustees of the national pros- 
perity."^ There must have been lingering in the 
recesses of the committee's memory Baer's letter 
already quoted. Also the committee came to the 
conclusion that these men should not be permitted, 
in relation to the money held by our banks, trust 
companies, and life insurance companies, "to control 
and utilize these funds as though they were their 
own."^ That this social development is so logical 
that the scientific mind of Marx could predict it 
nearly fifty years ago would have been news to the 
committee. Here is the passage in question: 
*'. . . the whole enormous extent of the credit 
system, in fact the total credit, is exploited by them 
[the bankers] as their private capital."'' 

The three banking institutions with which the 
three members of the inner group are more directly 
connected, J. P. Morgan & Co., National City Bank, 

^ Pujo Committee Report, p. 132. 

^ Id., p. 161. ild., p. 161. 

^ " Indem die ganze ungeheuere Ausdehnung des Kreditsystems, 
ueberhaupt der gesamte Kredit, von ihnen [Bankiers] als ihr Pri- 
vatkapital exploitirt wird. " — Kapital, vol. iv,, p. 15, 3d edition. 



Concentration of Money Capital 301 

and First National Bank, control by 341 director- 
ships 112 corporations having aggregate resources 
or capitalization of $22,245,000,000.^ Control of 
additional corporations by directorships is exercised 
by members of the second group. 

That the increasing concentration of economic 
power is not a peculiarly American development, 
but world-wide, most advanced of course in the most 
progressive countries, the United States and Ger- 
many, is shown by the official report of the Austrian 
Consul in Berlin made in 1906. He said: 

"Never before was economic Germany so entirely 
under the absolute rule of a group of men, barely fifty in 
number; in no former period of industrial expansion was 
the old saying of the "free play of forces" abandoned to 
such an extent as in 1 906, when the momentous decisions 
as to the extent of production, sales abroad, prices, the 
granting of credit, the raising of new capital, the fixing 
of wages, and the rates of interest lay in the hands 
of a few persons found at the head of the large 
banks, mammoth industrial undertakings, and great 
Kartells." 

The machine above described for making and 
distributing fictitious capital is in reality a monopoly- 
making monopoly, governing the people's most 
important concern, their work and their income. 
As one sphere of industry after the other becomes ripe 
for organization, it will not go for its purpose to 
Washington, to the seat of government of an econo- 
mically unconscious state, but to New York, where 

» Pujo Committee Report, Exhibit 134 B. 



302 Capital To-Day 

on the corner of Wall and Broad streets is the seat 
of the only power in the land that can help it. 

This machine is, however, only adapted for the 
original distribution of new issues to the ultimate 
consumer. That the latter shall be able to preserve 
his character as a loan capitalist requires the existence 
of ready markets for the conversion of fictitious 
capital back into money, namely, stock exchanges. 

These institutions are popularly thought of as 
places of iniquity. Mr. Thomas W. Lawson, a 
successful insider who ought to know, confirms the 
popular estimate of the stock exchanges and calls 
them the greatest gambling hells on earth. If their 
ethical status is so low, then it must be that the 
social system to which they are indispensable is of 
an equally low ethical status. 

It is certainly an expensively conducted gambling 
hell. Mr. Lawson tells us of a brokerage firm which 
has 25,000 miles of private wires, costing over $700,000 
a year. He gives some details of expense of one gam- 
bling shop for a year, totaling $800,000, as follows: 

Expenses of main office on Broad Street: salar- 
ies, $140,000; private wires, $60,000; rent, $25,000; 
$150,000 for sundries, meaning the usual entertaining 
paraphernalia, such as would be found in any gam-* 
bling hell. 

Plaza Hotel office: salaries, $12,500; rent, $17,000; 
sundry expenses- — rum, cigars, and small gambling 
outfits — $14,000. 

The Hughes New York Legislative Investigating 
Committee touched on some of these phases of 
brokers' offices as follows : 



Concentration of Money Capital 303 

Complaint has been made of branch offices in the city 
of New York — often luxuriously furnished and some- 
times equipped with lunch rooms, cards, and liquor. 
The tendency in many of them is to increase the lure of 
the ticker by the temptation of creature comforts. 

Mr. Lawson says that not infrequently these 
houses, after paying all these enormous expenses, 
make from two to five million dollars a year. A 
Wall Street gambling house must deal in at least 
4000 shares a day to pay merely expenses of $500 
a day. This is equivalent to a business in a year of 
$120,000,000. But houses of this size may do from 
300 to 500 millions a year. Larger houses may do 
25 million dollars a day. 

Of these transactions the Pujo Committee has 
this to say^: 

A small part of these transactions is of an investment 
character ... a far greater part represents speculation 
. . . more hurtful than lotteries or gambling at the race 
track or the roulette table, because . . . withdrawing 
from productive industry vastly more capital ; . . . quota- 
tions of securities are manipulated without regard to 
real values and false appearances of demand or supply 
are created; . . . the facilities of the New York Stock 
Exchange are employed largely for transactions pro- 
ducing moral and economic waste and corruption. 

The manipulation referred to consists mainly in 
simultaneous matched orders to buy and sell, giving 
an appearance of activity and of price tendency. 
The committee also complains of the influence 

'Report, p. 115. 



304 Capital To-Day 

which the Money Trust can exert on the prices of 
securities simply from its control of call loan rates 
from day to day, at least to the same extent as indus- 
trial trusts control commodity prices in their spheres. 

We cannot join in the condemnation by the Pujo 
Committee of the ''moral and economic waste" 
produced by the stock exchange, nor concur in its 
proposals for reformation. The latter are mostly 
unenforceable. In so far as they are enforceable, 
the objection to them is that they would interfere 
with — speculation (or gambling, to use Mr. Lawson's 
expression). 

Speculation on the stock exchange is the selling 
and buying of titles to revenue. It differs from the 
selling and buying of commodities in that the latter 
is a life condition of the capitalist system, of produc- 
tion, the process by which the profit, the sole pur- 
pose of production, is realized. The circulation of 
the titles is independent of the productive capital, 
a merely personal and private transfer of property, 
without effect on the production of profit or on its 
realization by the sale of the commodities. There- 
fore, while profit is value produced by the working 
class for which value it receives no equivalent, the 
gains or losses of one speculator are the losses or 
gains of another speculator, and do not affect the 
working class. The matter may also be stated this 
way, that inasmuch as the workers are paid normally 
the value of their labor power, profit is in the exist- 
ing order nobody^s loss, while speculative gain must 
always be another's loss. The political economists, 
who do not know the source of profit, are unable to 



Concentration of Money Capital 305 

distinguish it from the speculator's gain. To them 
both are equally profits. 

The investor is interested in increasing profit. To 
the speculator increase or decrease of profit are 
matters of indifference; what he is concerned in is 
price fluctuation. His gain consists in the price 
difference between what he can sell at, having 
bought previously, or what he can buy at, having 
sold previously. His estimate of the value of a 
revenue title has been the source of his gain or his 
loss. If all speculators were of one mind, all speculat- 
ing in the same direction, at the same moment, and in 
the same volume, there would be no gains. 

The uncertainty of speculation (except for the big 
insiders, the scientificos, the wise-ones) is the very 
life principle of the stock exchange. This uncer- 
tainty may bring about changing moods several 
times during a day. These produce changing rela- 
tions of demand and supply, resulting in changed 
quotations; every change of quotation induces new 
speculation, and so on ad infinitum. 

Thus it is the function of the speculators and the 
stock exchange to provide a market ready every 
minute to convert fictitious into money capital. 

Put to the test, it is true, the stock market has 
often failed, as in 1907, when it was no more possible 
to get money for revenue titles than to get money 
out of banks. The conversion of fictitious into 
money capital is easy when there is no great need for 
it, and diffictdt when the need is pressing. But the 
argument against the stock exchange in this regard is 
no stronger than against the banks. Everybody can 
20 



3o6 Capital To-Day 

convert fictitious money into real m.oney, when 
there is no pressure, but not when there is. 

Stock exchange speculation did not exist in the pre- 
corporation days of capitalism. It is conceivable 
that it will become obsolete in the perfect monopoly 
epoch of capitalism in the future. But in the 
present period of transition it is one of the many 
unavoidable wastes inherited from the period of 
competition now passing into history. 

The mention in this recital of the names of half 
a dozen contemporaries has been necessary for a 
better understanding of the social changes in bringing 
about which these men had so conspicuous a part. 
Yet they were only the tools of a historic epoch in 
which, within a short span of time, matured what 
capitalist society had been long in preparing. The 
rapid increase in the private fortunes of a few thou- 
sand magnates is now assured and automatic and 
every census will show the effect in increased industrial 
concentration. These leaders will pass away, but 
the central money power organized by them will 
continue to exist and pursue its mission of clearing 
the way to a higher social order. 



CHAPTER XIII 

THE UNIFIED CAPITAL AND CONCLUSION 

THE outcome of competition has been conditions 
of threatening or actual bankruptcy. The 
outcome of such conditions has been monopoly. 
The perfect monopoly is therefore the ending of the 
phenomenon of bankruptcy. 

During the competitive stage of capitalism the 
planless production necessarily resulted from time 
to time in a market glutted with commodities which 
their producers were unable to buy. The outcome 
was the industrial crisis. Under monopoly there 
may be also fluctuations in the supply, due to natural 
causes, such as the varying supply of raw materials, 
but overproduction of commodities due to ignorance 
of conditions, secretiveness, or even positive mis- 
leading as to the state of production, will have ceased, 
and with it one of the causes of crises. 

During competition there was no possibility of 
adjustment between the money turned into means 
of productive consumption (especially fixed capital) 
and that turned into means of individual consump- 
tion. The consequence was a deadlock between 
these two divisions of industrial capitalists, resulting 
in the industrial crisis. The industrial trust is a 

307 



3o8 Capital To-Day 

notice to all the world that the constructions, machin- 
ery, etc., in its sphere are sufficient for all demands. 
The monopoly thereby removes this important 
cause of the industrial crisis. 

During competition lenders and borrowers met as 
separate interest groups. This dualism often left 
the lender in a dubious frame of mind regarding the 
continued solvency of the borrower, especially when 
there were indications of economic or political 
disturbance in some part of the world. ' ' Capital is 
timid" (when only a few per cent, per annum were at 
stake), was the stock phrase of its scribes, and they 
never tired in warning other people not to frighten 
capital. In refusing to lend, the money capitalists, 
acting as individual persons or concerns, precipitated 
the crisis. 

Monopoly does away with the dualism of lenders 
and borrowers. The social money capital takes the 
form of revenue titles created by a central power 
which controls all industries in the interest of the 
owners of the titles. Industrial capital and money 
capital become one. Their dualism, as a cause of 
crises, disappears. 

The credit system is an outgrowth of the function 
of money as means of deferred payment. Credit 
and instruments of credit, the whole credit system, 
disappear when the various industries are merely 
departments of the same concern. The relations 
of the departments with each other and with the 
main office are matters of bookkeeping. 

So long as competition survives to any consider- 
able extent, the striving for a higher than the average 



Unified Capital and Conclusion 309 

profit rate is an economic necessity for the individual 
capitalist whose economic survival depends on the 
success of his striving. The tendency of this striving 
is to eliminate the individual functioning industrial 
capitalist, and to concentrate every industry. 

This process completed, the central power has no 
reason for permitting the continuation of unequal 
profit rates. On the contrary, it is interested in a 
perfectly uniform profit rate for all capital in order to 
unite the class it represents and to avoid the breed- 
ing of a rebellious spirit in the working class in con- 
sequence of extortion by monopolies producing 
indispensable necessaries of life. 

The establishment of a uniform profit rate has the 
further effect of rendering meaningless the multi- 
plicity of denominations of fictitious capital. All 
varieties of shares and bonds may as well be refunded 
in shares of the universal capitalist corporation, in 
principle merely the extension of the present idea of 
the holding company. 

When uniform titles to income have supplanted 
shares and bonds, when fictitious capital has been 
modified into plain" certificates of class privilege, the 
curtain falls over the portals of the stock exchanges. 

Capitalist society is then one universal stock 
company in which the profit share of each capitalist 
is determined with exactness. Thus is realized 
what has been the aim of competition, but what 
competition was unable to accomplish even approxi- 
mately : — for equal capital equal profit ! 

The industries are then socially organized and 
coordinated. It is the end of economic anarchy. 



310 Capital To-Day 

During the reign of this anarchy a thing of value, 
as the socially recognized equivalent of every product, 
had been a necessit3^ Only by money could the 
social worth of the individual's labor be attested. 
Now there is only one producer, the universal 
capitalist corporation, accountable only to itself. 
It does not produce commodities, it does not pro- 
duce for a market, it does not exchange its products 
with other capitalists, it only produces use-values for 
direct consumption. 

These use-values are delivered to the capitalists 
and workers against the surrender of consumption 
certificates which have supplanted money. 

The prices of these use-values are not the economic 
expression of the relation of a thing to things, but 
an arithmetical result, regulating distribution by 
persons to persons. Money has fulfilled its aim — the 
establishment of a regulated society. 

Society has evolved into an oligarchy — consisting 
of a very small minority of the people, the capitalists, 
enjoying class privileges based on ownership of the 
means of production, and an immense majority, the 
workers, whose labor power, however, ceases to be 
a commodity selling at the market price, inasmuch 
as there exists no market. The compensation for 
labor is no longer regulated by an economic law, but 
by arbitrary agreement depending on such factors 
as power and discretion. 

Such would seem the outcome of a logical sequence 
of economic causes and effects. It is by no means a 
prophecy. Our concern is with the science of eco- 
nomics, the processes of the capitalist system of pro- 



Unified Capital and Conclusion 311 

duction and its tendencies. Were we to indulge in 
prophecy, we should indeed be inclined to say that 
none of the logical developments above deduced will 
ever be reached. And for several reasons : 

First, it is not the method of history to wait until 
conditions are rotten ripe before replacing outworn 
social systems by new ones. 

Secondly, the progressive socialization of produc- 
tion develops social consciousness which finds expres- 
sion through the state. The contradiction between 
the democratic state and the plutocratic power 
within the state calls for settlement. An antago- 
nism of classes, so barefaced and extreme, cannot 
be envisaged, in spite of its logic, as coexisting with 
political equality. 

Thirdly, the financial mechanism, already pre- 
carious and becoming more so with each year, is 
subject to the sudden vanishing of the social faith, on 
which alone it rests. Its breakdown would intercept 
the progress of capitalistic monopolization before 
reaching its final and logical goal. 

If the social insolvency, which is covered in ordi- 
nary parlance by the word ' ' credit, ' ' cannot be denied, 
then we shall be confronted sooner or later with the 
tremendous convulsion of social bankruptcy which 
is to give birth to a new society. Nothing will 
avail against this final outcome of a long process of 
evolution — no paper money "based on the credit 
of the nation," whatever hallucination this phrase 
of the American greenbackers may have covered ; no 
bi-metallism at any ratio whatever; no federal re- 
serve acts ; no transfer of the banking business, with 



312 Capital To-Day 

all its assets and liabilities, to the state; no collection 
of all the gold of a country into a single reservoir, 
to be kept there, as in a fortress, out of danger of 
exportation; no decree threatening penalties for 
paying, or offering to pay, a premium on gold; no 
other scheme which might be broached by some 
imaginative mind — the will and purpose of no man, 
or set of men, or of all men, will avail to preserve the 
life of the passing form of society, the commodity- 
producing society. It cannot live without the free 
exchange of commodities, a single one among which 
must be in the equivalent form of value. 

History can never overestimate the importance of 
the part played in human progression by the yellow, 
glittering metal. If we could attribute purpose to 
nature, we would now be in a position to say that 
gold had been placed by nature into the hands of man 
as a tool for the erection of an edifice in which was to 
dwell a race emancipated from physical care and thus 
free to devote its mental gifts to the highest aims. 
But in all animate nature the advance from lower 
to higher forms of existence is replete with tragedy. 
Cruel is its basic law — the struggle for existence. 
This struggle is about to be eliminated within the 
human species to survive solely as a struggle for its 
mastery over nature. 

In conformity with nature's general method, 
human progression has led through a vale of tears and 
sorrows. The golden tool became the master of the 
workman, setting the pace for him, driving him 
pitilessly and relentlessly toward the completion 
of a task he understood not. The fateful gold ruled 



Unified Capital and Conclusion 313 

giants and dwarfs, gods and men. Now the wave is 
rising which will sweep away the Ring of the Nibe- 
lung, stripped of power, cleansed of blood, its natural 
character restored — that of being a mere thing of 
beauty and guiltless delight, mere Rheingold. 



THE END 



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